Just over a month into the US-Israel war against Iran, energy markets appear to be holding up, with crude oil prices hovering between $100 and $115 a barrel. But that’s not the number that matters. What matters is the cost of the essentials that come out of that cesspool, and the picture is bleak and getting worse.
The sharp end of the spear for the world economy is the increase in the cost of jet fuel, which has more than doubled in the month since the war began. above $195 per barrel as the global average. Crude oil has risen only 50 percent since the war began.
Just over a month into the US-Israel war against Iran, energy markets appear to be holding up, with crude oil prices hovering between $100 and $115 a barrel. But that’s not the number that matters. What matters is the cost of the essentials that come out of that cesspool, and the picture is bleak and getting worse.
The sharp end of the spear for the world economy is the increase in the cost of jet fuel, which has more than doubled in the month since the war began. above $195 per barrel as the global average. Crude oil has risen only 50 percent since the war began.
The increase in the cost of jet fuel has an immediate impact on airlines and economies in Asia and Europe, above all. Airlines are canceling flights, grounding flights, increasing fuel costs, and otherwise they struggle in order to cope with the doubling of their cost over one night. Given that international air travel is a $4 trillion industries, and commercial air cargo carries another $8 trillion product value, is a major challenge for a major industry with many impacts.
“Asia was the first to show pain, but it was followed by Europe,” said Tom Kloza, an independent energy analyst who specializes in refined products. The rapid rise in the cost of jet fuel is a sign of things to come for other refined products that are more important to the world economy, he said. “Following the global impact on transportation fuels: Jet feels the strain first, then diesel, then gasoline.”
A barrel of crude oil is worth less than the sum of its parts. Refined petroleum products not only drain more volume from the fuel barrel, they drain more value; that’s why John D. Rockefeller monopolized the refinery business, not the headlines. But not all refined products are created equal, which is why jet fuel feels scarce and expensive right now. (“The spread,” or the difference between the input and output prices of jet fuel, it’s up more than 200 percent since the war began.)
Globally, the mix varies, but that comes out of US refineries is a useful guide: About half of that product is gasoline, just under a third is diesel, and about 10 percent is jet fuel. The rest is made of asphalt, nylon, and Lego bricks.
Commercial jet fuel comes in two varieties, as well as several flavors specific to military use. But the bottom line is that jet fuel is much more (and expensive) to refine than a simpler product like gasoline. It should work at freezing temperatures, have a very high flash point, and be completely free of dirt. It is also very difficult to store because it deteriorates, which is why jet fuel reserves are measured in days, rather than months in which crude oil and refined base products are measured. That is what causes the disruption of one-fifth of the world’s crude oil and one-fifth of its refined output with the closure of the Strait of Hormuz thus distress.
Asia did feel a pinch first, and still is. “We saw prices in Singapore and Asia go up to $200 to $250 a barrel (for jet fuel) at the end of March, and who knows where we’re going now,” Kloza said.
Australia, in particular, is in pain because it is ordered a lot of jet fuel from China and South Korea, both of which have curbed exports of refined products. But the rest of Asia is also in trouble: Korean Air takes “emergency measures” to deal with the conflict fuel costs. Chinese airlines they get nervous too. China and South Korea, along with Thailand, depended on regular supplies of Middle Eastern crude at their refineries to pump out jet fuel for the regional market. But all that has been interrupted.
European airlines are also not operating in extreme heat, especially Irish and UK carriers. Ryanair, the largest European airline, already he warned that oil shortages may reduce summer schedules. British Airways and the rest of the British aviation industry are prepare for the impact because the country relied heavily on exports of refined jet fuel from the Middle East that have been halted by the Iran war. Lufthansa is paying attention calm down something like 5 percent of its fleet.
The US is in a relatively good position in terms of jet fuel, as it improves about 2 million barrels of products per day and requires only about 1.8 million barrels. The problem is that the cleanup takes place on the Gulf coast of the United States, and most of the airports are on the other two coasts; the west coast, in particular, depended on imports of Asian jet fuel that would not come. American airlines are still preparing at worst, meaning that chaos at US airports in March did not represent the bottom line.
The jet fuel crisis is a problem because of its impact on key sectors in the wider economy, but also because it reflects the wider and more painful impact from the middle of the barrel, which is diesel. That’s what fuels trucks and tractors. As diesel prices rise, so do food prices, which were already under pressure from high fertilizer costs due to the Iran war.
Paper oil markets (that is, oil future contracts) have so far taken the US-Israeli war against Iran, causing the biggest energy shock in history, at a rapid pace, especially since the US President, Donald Trump often lowers the price of oil in anticipation of a quick end to the war. But real markets, like the supply of jet fuel or diesel, have this thing about them: They are real. As soon as the price.
