The volatility of fuel

Nov. 8, 2000

The volatility of fuel

Low inventories and a harsh winter could affect jet-A supply, prices

By John F. Infanger & Jordanna Smida, Editorial Staff

November 2000

That is the overriding message offered by oil industry officials during discussions in October at this year?s National Business Aviation Association trade show in New Orleans. It all centers around the futures market, and as oil companies look down the road they see potentially cheaper per barrell prices for crude. ?It?s a product-driven market,? says a supplier. ?The futures market tells us the price will go down; that?s the reason for low inventories.?

Says another, ?Just-in-time inventory is alive and well in the oil industry.? For diesel, from which jet-A is derived, there is currently about a 23-day supply in the U.S. system; traditionally, say suppliers, inventory on hand has been around 38 days.

This becomes even more pertinent when oil companies look at their bottom lines, which have turned lean in recent years because of the relatively low price of a barrel of oil globally. (In fact, say officials, in 1980 dollars fuel costs less today in the U.S. than 20 years ago.) Oil companies have had to become more efficient — a driving force in the mergers of Exxon and Mobil, BP and Amoco, and the proposed buyout of Texaco by Chevron.

?Volatility is the name of the game,? explains one official. ?We have never seen the volatility (of price) over such an extended period of time.?

In turn, the situation with the long-term market price of crude oil has led to what some term the extraordinarily low inventories. This raises a concern for aviation: Should a severe winter hit the nation, jet-A producers could be forced to pull product from the jet-A pool and redirect it for heating oil.

Market uncertainty is a continuing theme with oil company officials, and for the first time in years the word ?allocation? reentered the discussions with several suppliers. Others, however, are more optimistic that supply will not be a problem for the foreseeable future.

Compounding the supply question, according to an official, is the fact that it is extremely difficult to build a new refinery in the U.S. today, because of cost and environmental concerns. Thus, when one refinery shuts down for something as routine as maintenance, it can have a farther reaching effect than in years past.

Taking a more optimistic view, some officials see the higher price per barrel stabilizing, which will lead to improved profitability for suppliers as well as creating incentives to produce domestic crude. Long term, this should lead to stability of supply and price.

Regarding avgas, suppliers do not see an immediate no-lead alternative on the horizon. The primary challenge there, they say, remains with the engine technology.

A concern with avgas, however, is that the alkylation process associated with its manufacture is also used for creating ?boutique fuels,? such as the reformulated autogas used in various cities around the U.S. Alkylates are unusual, explains an official, because they offer high octane with lower vapor pressure, important for aircraft engine performance.