The Situation With Supply

ORLANDO — As the oil industry slowly recovers from the hurricane disruptions of 2005, officials of aviation fuel suppliers are confident that getting product to dealers and aircraft owners will not be a problem for the foreseeable future, barring any political or natural catastrophic events. Price remains a volatile issue, and one of the factors affecting cost is an increasing problem in finding qualified hazmat drivers who can deliver the product. That has become an issue since the Transportation Security Administration imposed new background check rules on the industry. It is, officials say, another cost of doing business in a world fighting terrorism. It's also a reason for dealers to be on top of their inventory, since finding a truck may take a bit more.

During the recent annual convention of the National Business Aviation Association, AIRPORT BUSINESS met with representatives of many of the leading aviation fuel suppliers/distributors to get their assessment of the recently volatile fuel market.

One result of the roller coaster ride of late, says a supplier, is that the public and aviation users have become educated about the delicate balance that exists in the supply chain, from refinery to pipeline to truck to retail. “There’s such a tight balance between supply and demand, that disruptions such as Katrina and Rita throw us so far out of whack.

“Spot markets see their prices jump all over the place. In 2002, the average price move on the Gulf Coast spot market for jet fuel was a penny a gallon, on a daily basis. In 2005 that average has been five cents.”

Regarding the bigger question of will there be supply available down the road, one rep sums up the overall prognosis, “I think supply is secure for both jet and avgas. We don’t forecast a shortage.”

Next Question: Price
The second question, price, is much less clear, say officials. There are new demands on demand — China and India, a reemerging Southeast Asia. There remains no new refining capacity in the U.S., with the exception of technological streamlining, and domestic demand continues to grow. Add major disruptions to supply and new regulations, and costs continue to go up, affecting price.

During the Katrina/Rita disasters, the Gulf Coast supply chain was virtually shut down, from refineries to pipelines. The Gulf Coast supplies some 50 percent of fuel supply to the East Coast — there is an upward flow of distribution from the Gulf northward. After the hurricanes, the supply chain had to be reversed, and costs had to be added. The end result was not only higher prices but a disparity in prices across regions.

Getting oil was not the issue. As one rep puts it, there was a flotilla of tankers just waiting to deliver oil to the thirsty U.S. market. Getting it through the chain, at higher costs, was the challenge.

Price with fuel tends to be directly tied to volatility of the marketplace. One fuel supplier economist expects that the future will bring one of two realities:

1) This is just another cyclical spike and prices will drop (despite some higher costs that will remain). Global economic recovery and strong demand growth will result in a calming with price and supply.

2) This is a paradigm shift; we’ll never see $15/barrel oil again. There are new demands on supply worldwide, and there is more restricted access to reserves by countries with national oil companies who no longer need partnerships with Western oil companies. Price and supply become much harder to predict.

Another factor affecting the price of product, explains another oil official, is the high cost of steel worldwide. “There’s been a spike in finding [reserves] and development costs,” says the official. “It’s one of those things that are contributing to the pricing increases. But again, the price of steel may be cyclical in nature.”

The Transportation Issue
The TSA’s requirement for background checks for drivers of hazmat trucks is causing a strain on supply of available drivers, say officials, and is having an impact on turnaround time getting product to customers. The demand for drivers is affecting the cost.

One overriding message: don’t wait to order supply. “The trucking industry does not have the extra capacity,” says one official. “You don’t see trucks just standing by.”