Supply and Demand

Supply & Demand Analysts look at the market for jet-A, avgas BY John Boyce, Contributing Editor June 1999 Many oil industry veterans will tell you that oil is one of the few commodities left whose price is as close to pure...

"If the prices are going to be holding in this $12 to $15 a barrel range," one says, "what the companies are forced to do is get their cost down to a level where they can make money at those kind of prices. If prices were $20 to $30 a barrel there wouldn't be a significant effort to consolidate. When people are comfortable, there's no pressure to change."

Greater efficiency leads to less cost and, eventually, reduced cost to the consumer. However, one industry veteran says, quoting a union official, "cost reduction is a nice way of saying ’laying off people'" and it translates to increased margins, never price reduction.

The seasonal nature of driving and flying is particularly important to the avgas market. Along with the normal economic pressure on refiners to use more of the octane pool to meet the ever increasing demand for motor gasoline and thus increase revenue, as motor travel increases during the spring and summer, refiners will feel added pressure to shorten the supply of avgas in favor of motor gas.

Although nobody says that avgas will be in extremely short supply in the near future, it could get that way long term if refiners shut down or cut back their avgas production in favor of motor gasoline. Consolidation in the industry and many small refiners going out of business also will have an impact on avgas supply and the price for it.

"As we know," says an insider, "avgas has continued to compete for the same components that they use to make regular gasoline.... As a result of that, as there become fewer and fewer players, there could be increased pressure to attract a little more profit out of the avgas. To what extent and how much that happens is really tough to say. That's purely speculation. Practically speaking, there are very few players other than the major oil companies supplying avgas. On the West Coast there is no independent avgas, it's all supplied by the major oil companies."

With so few refiners, a decision by one or two of them to cut back on or completely eliminate avgas production could have a major impact on the availability of avgas, according to a major oil company source. "That (avgas) is tightening up quite a bit. I won't name names, but there are some producers who are now critically looking at whether they want to continue producing avgas. This changes in terms of what's needed for motor (gasoline) and some of the new emission requirements.

"What's happening (is), refineries are needing to put more of the octane pool into motor (gasoline) which is putting a lot of pressure on the avgas business, and it's going to severely cut back on their ability to produce avgas. So much so, (that) I've heard strong rumors that some refiners — one in particular has three refineries that produce avgas — are seriously modeling the scenarios of not producing it any more. If that happens, that will really tighten up avgas (supply)."

While some refiners are, apparently, considering eliminating avgas, there is some indication that another major producer is considering increasing its avgas production. However, even that, if it happens, won't be for another one or two years.

"In that time," says one industry analyst, "avgas could get very, very tight. Very tight, based on the assumption that some refineries will decide that they will not make avgas."

Nobody expects the availability of jet fuel to be shortened, at least not for the foreseeable future. Producers will meet their commitments, and nobody is expecting a huge price increase.

But the price will rise. How much depends to a large degree on whether or not OPEC (and a few allied non-OPEC producers) carries through with it's proposed reduction in crude production and, of course, whether or not military jet fuel consumption increases dramatically.

There have been some stiff increases over the past month or two on the West Coast, says one oil industry analyst, because of the refinery problems. "I don't expect significant increases beyond where we are now on the West Coast," he says.

"You actually have to separate the country into two marketplaces: One is the West Coast and the other is the rest of the U.S.... The West Coast, I don't expect to have a substantial increase now, and I expect it to actually start to come down over the next couple of months — not to where it was but some decrease because right now it's being impacted by a lot of refinery problems.

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