Even as the price of gasoline begins to return to its mid-summer pricing levels, don't expect the cost of jet fuel to decline by similar margins. "Jet fuel is an innocent bystander in a drive-by shooting," says David Goldwyn, president of a Washington-based energy consulting firm, Goldwyn...
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Even as the price of gasoline begins to return to its mid-summer pricing levels, don't expect the cost of jet fuel to decline by similar margins.
"Jet fuel is an innocent bystander in a drive-by shooting," says David Goldwyn, president of a Washington-based energy consulting firm, Goldwyn International Strategies. "It is in competition for the same part of the barrel of crude as diesel and home heating oil."
In the coming year, the cost of jet fuel at best will decline by seven to eight cents, to $1.88 per gallon, Goldwyn said in an address to the fall meeting of the Regional Airline Association (RAA). The price will hold in this range until 2007 - if no crisis intervenes.
Furthermore, Goldwyn does not expect the price of crude to drop below $50 a barrel "for the rest of the decade."
The gap between the price of crude oil and refined jet fuel for 2005 will be $14.72 per gallon, Goldwyn said. "When you see the price of crude oil go up, the spread you see between crude oil and jet fuel gets wider."
Worldwide competition for the same grouping of hydrocarbon molecules, which can be processed into jet fuel, diesel or home heating oil, coupled with a lack of refining capacity, is what is driving up the price of jet fuel. And, the demand for jet fuel is not growing as fast as the others.
The widely publicized economic growth in China and Asia has put pressure on the petroleum supply. In the past, Saudi Arabia, Venezuela or Iran typically had enough available crude and refining capacity to act as a cushion in a crisis. "This spare capacity no longer exists," Goldwyn said. At any given time there are only 2 million barrels of crude in excess of the daily demand.
Venezuela, Iran and Nigeria are now the unpredictable variables that could trigger a future crisis, he said.
But it is the type of refined petroleum distillates that is putting the pressure on jet fuel prices. China is powering its growth on diesel just as Europe has turned to diesel- powered cars.
In 2004, the world demand for diesel, heating oil and jet fuel grew by more than 1 million barrels per day. The demand in the Asia Pacific grew by 50 percent in one year. Demand grew by 5 percent in Europe, as 50 percent of cars there are now diesel-powered.
At the same time, the demand for jet fuel has remained relatively flat. The U.S. airlines consume 20 percent of the world's jet fuel and the nation imports 250,000 barrels of jet fuel per day. At the same time, the U.S. refining capacity has expanded to produce nearly that same amount, he said.
Even as worldwide demand has pushed up the price of crude oil, Goldwyn said the price rise has not curtailed demand for crude in Asia. Government subsidies cushion the retail price that consumers pay in a number of Asian countries, so consumers don't feel the price pinch and don't cut back on usage.
The wrath of Hurricanes Katrina and Rita continues to hold down domestic U.S. production and refining by 800,000 barrels a day, Goldwyn said. Some 200,000 barrels of that would be refined into jet fuel, he noted.
The demand for diesel creates premium pricing for scarce light, sweet crude that can easily be refined into diesel, heating oil and jet fuel. Goldwyn said there are fewer refiners available to crack the more plentiful heavy, sour crude in these distillates.
The refineries in Europe and Asia were built to crack gasoline out of crude while the refineries in the former Soviet Union have not been modernized. These refineries can't be "tweaked" to handle the heavier crude.
The price of gasoline has fallen because surplus gasoline from Europe is now being shipped to the United States. "We are now getting price relief for gasoline, but not diesel or home heating oil," he said.
There is a light at the end of the tunnel, but the situation will not improve until 2007, Goldwyn said. Refinery projects under way in China and the Middle East are scheduled to come on line in 2007.
"There is no short-term answer to reduce the cost of crude or jet fuel," Goldwyn said, "but there are lots of long-tem answers."
Conservation is as important as boosting production and refining capacity, he said. The U.S. should adopt stricter car fuel efficiency standards, just as European and Asian governments have.
"Technology is really the answer," he said. Technology can be used to formulate biodiesel, develop hydrogen-fuel cars and render the waste from nuclear power plants harmless. "We need a national technology policy, not a hodgepodge of energy programs," Goldwyn said.
The oil industry does need assistance in finding environmentally safe locations to build new refineries. However, the refiners don't need financial incentives to build more refineries.
Because of market forces, oil companies - which are earning record profits - are giving more money back to the shareholders instead of investing in new sources. U.S. and international oil companies have not invested in developing new petroleum reserves since 1998. The small private companies - freed of Wall Street expectations - are now the ones investing in developing new oil fields.
>>Contact: David Goldwyn, Goldwyn International Strategies, (202) 223-3520.<<
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