Why Jet Fuel Is the Real Harbinger of the Energy Crisis

The sharp end of the spear for the global economy is the spike in the cost of jet fuel, which has more than doubled in the month since the war began to more than $195 a barrel as a global average. Crude oil is up a mere 50 percent since the war began.

That spike in the cost of jet fuel is having immediate impacts on airlines and economies in Asia and Europe, above all. Airlines are canceling flights, grounding planes, adding fuel surcharges, and otherwise struggling to deal with an overnight doubling of their biggest single cost. Given that global commercial aviation is a $4 trillion industry, and commercial air cargo carries another $8 trillion worth of goods, it’s a huge challenge for a major industry with lots of knock-on effects.

“Asia was the first to show the pains, but they were followed by Europe,” said Tom Kloza, an independent energy analyst who specializes in refined products. The sharp uptick in the cost of jet fuel is a harbinger of things to come for other refined products that are even more important for the global economy, he said. “In order of global impact on transportation fuel: Jet feels the pinch first, then diesel, then gasoline.”

A barrel of crude oil is worth less than the sum of its parts. Refined petroleum products not only squeeze more volume out of a barrel of oil, they squeeze out a lot more value; that is why John D. Rockefeller monopolized the refinery business, not wellheads. But not all refined products are equal, which is why jet fuel is feeling a particular and pricey pinch right now. (The “crack spread,” or the difference between input and output price of jet fuel, is up over 200 percent since the war began.)

Globally, the mix varies, but what comes out of U.S. refineries is a useful guide: About half of the product is gasoline, just under one-third is diesel, and about 10 percent is jet fuel. The rest is for asphalt, nylons, and Lego bricks.

Commercial jet fuel comes in two varieties, in addition to several special flavors for military applications. But the important thing is that jet fuel is a lot more intensive (and expensive) to refine than simpler products such as gasoline. It has to work at freezing temperatures, have a very high flash point, and be absolutely pure of impurities. It is also a lot harder to store because it degrades, which is why stockpiles of jet fuel are measured in days, rather than the months crude oil and basic refined products are measured in. That is what makes the disruption to one-fifth of the world’s crude oil and one-fifth of its refined output with the closure of the Strait of Hormuz so distressing.

Asia did feel the pinch first, and still is. “We saw Singapore and Asian prices go to $200 to $250 a barrel [for jet fuel] toward the end of March, and who knows where we are headed now,” Kloza said.

Australia, in particular, is in pain because it imported much of its jet fuel from China and South Korea, both of which have restricted exports of refined products. But the rest of Asia is also in trouble: Korean Air is taking “emergency measures” to deal with the crisis. Japan’s big carriers are hiking fuel surcharges. Chinese airlines are getting nervous as well. China and South Korea, as well as Thailand, relied on steady supplies of Middle Eastern crude into their own refineries to churn out jet fuel for the regional market. But all that has been interrupted.

European airlines aren’t doing so hot, either, especially Irish and British carriers. Ryanair, Europe’s largest airline, already warned that the fuel crunch could curtail summer schedules. British Airways and the rest of the U.K. aviation sector are bracing for impact because the country was heavily reliant on exports of refined jet fuel from the Middle East that have been halted by the Iran war. Lufthansa is considering grounding something like 5 percent of its fleet. 

The United States is in a relatively good place in terms of jet fuel, since it refines almost 2 million barrels of the stuff a day and only needs about 1.8 million barrels. The problem is that the refining takes place on the U.S. Gulf coast, and a lot of the airports are on two other coasts; the west coast, in particular, was reliant on imports of Asian jet fuel that will not be coming. U.S. airlines are still preparing for the worst, with the implication that the chaos at U.S. airports in March did not represent rock bottom.

The jet fuel crisis is problematic because of its impact on a major industry in massive economies, but also because it foreshadows a broader and much more painful impact from the middle of the barrel, which is diesel. That is what fuels trucks and tractors. As diesel prices rise, so does the price of food, which was already under pressure due to higher costs of fertilizer due to the Iran war. 

Paper oil markets (that is, oil futures contracts) so far have taken the U.S.-Israeli war on Iran, and the resulting biggest energy shock in history, in stride, especially since U.S. President Donald Trump often jawbones down the price of oil with predictions of a quick finish to the war. But physical markets, like the supply of jet fuel or diesel, have this thing about them: They are real. As will soon be the prices.