Expect increased global flight cancellations due to jet fuel shortages: Energy Aspects’ Amrita Sen

Key Concepts

• Product Markets vs. Crude Oil: The distinction between raw crude oil and refined products (jet fuel, diesel, gasoline). Product markets lack the inventory buffers that crude oil possesses.
• Refining Capacity: The global ability to process crude oil into usable products. Significant capacity has been lost since pre-COVID-19, leading to structural supply shortages.
• Demand Destruction: An economic phenomenon where high prices force a reduction in consumption, effectively balancing supply and demand when production cannot be increased.
• Stock-outs: A situation where supply is physically unavailable, leading to service disruptions (e.g., flight cancellations).

1. The Jet Fuel Crisis in Europe

Amrita Sen, founder of Energy Aspects, highlights that the current energy crisis is primarily a product market crisis rather than a crude oil crisis. While crude oil had inventory buffers and floating storage from Russia, refined products did not.

• Geographic Vulnerability: Europe is uniquely exposed because the bulk of its jet fuel imports originate from the Middle East. Disruptions in the Strait of Hormuz directly threaten this supply chain.
• The "Stock-out" Risk: Unlike gasoline or diesel, where consumers can reduce driving in response to high prices, airlines operate on pre-sold tickets and fixed schedules. This rigidity makes airlines unable to easily adjust demand, leading to the risk of physical "stock-outs" where fuel is simply unavailable at airports.

2. Global Impact and Flight Cancellations

The shortage is not limited to Europe; it is a global phenomenon with cascading effects:

• China’s Preemptive Measures: China has implemented a product export ban to ensure domestic security. They have already begun canceling routes to parts of Asia and Australia due to concerns that fuel will not be available for return flights.
• Africa: Internal flight cancellations have already been observed in Africa as a result of the tightening supply.
• Europe’s Outlook: Sen predicts that Europe will be the next region to face mandatory flight cancellations due to the lack of local refining capacity and the inability to source sufficient imports.

3. The Structural Refining Deficit

The core of the issue is a long-term decline in global refining capacity.

• Capacity Loss: Millions of barrels per day of refining capacity have been shut down since the pre-COVID era.
• The 2030 Recovery Timeline: Sen provides a stark statistic: if the world lost 450 million barrels of products during Q2, and global refineries were to increase output by half a million barrels per day (which is difficult as they are already running at maximum capacity), it would take until 2030 to recover the lost volume.
• New Infrastructure: While new refineries are planned in Asia (specifically India), these projects are likely to be delayed by the current conflict, as they rely on Middle Eastern crude oil. Building new refineries is a long-term solution, typically requiring 5 to 7 years.

4. Economic Perspectives and Market Outlook

• Demand Destruction as the Only Mechanism: Because building new refineries is not a short-term fix, the market must rely on "demand destruction"—where prices rise so high that consumption is forced down—to bring the market back into balance.
• Regional Insulation:
  • The United States: The U.S. is the most insulated region due to its high levels of domestic crude and product production. However, it is not immune; the West Coast, in particular, remains vulnerable to price spikes.
  • Most Affected: Europe, Asia, and Africa are identified as the regions most susceptible to the current supply-demand imbalance.

Synthesis and Conclusion

The energy crisis has shifted from a crude oil supply issue to a critical shortage of refined products, with jet fuel being the most vulnerable. The combination of reduced global refining capacity, reliance on Middle Eastern imports, and the inability of airlines to reduce demand without service disruptions creates a high risk of systemic flight cancellations. With no short-term capacity to increase production, the global market is forced into a painful period of price-driven demand destruction, with Europe and emerging markets facing the most acute risks.