With so much volatility in the price of oil over the last decade, who can blame the airline industry for “going big” these past couple months and placing bets on emerging renewable jet fuel companies?
The list of deals is long: AltAir signing an MOU with 14 airlines to supply camelina-based fuel, BioJet and Great Plains working together to develop their own green fuel derived from camelina, Kingfisher Airlines working with three companies on R&D for renewable jet fuel, and Qatar Airways leading a consortium to investigate potential biofuels, just to name a few.
Despite what the reports may indicate, renewable jet fuel is not about reducing emissions — the carbon regime is not sufficiently developed or binding at this point to drive investment — but about the emerging inevitability of higher fuel costs.
According to the Air Transport Authority (ATA), the industry trade organization for the leading U.S. airlines, fuel expenses have historically ranged from 10 to 15 percent of U.S. passenger airline operating costs, but averaged more than 35 percent in the third quarter of 2008.
Projections from the International Energy Agency suggest that oil prices will remain high in the near term. According to the IEA, $40 oil is still high and capacity constraints, geopolitical uncertainty, and demand growth will not disappear overnight and will continue to provide price support in the next few quarters. Long term is anyone’s guess, but the oil market’s growing volatility is driving demand for alternative sources of fuel.
The graph below, taken from this article, shows a dramatic increase in oil price volatility:
Within this context, the International Air Transport Association (IATA) blasted governments and oil companies for failing to invest in the development of aviation biofuels. This article from Flight International notes:
Both IATA and Airbus are calling for government authorities to support the aviation industry’s efforts to gain priority access to biofuel, arguing that the industry does not have other energy options because, unlike the automotive industry, it cannot use electricity, while hydrogen would not be economically viable even if it were technically achievable.
IATA’s criticism touches on a difficult question: in the face of growing fuel price uncertainty and volatility, are biofuel products best invested in auto transport or aviation?
As demonstrated by recent movements in the “crack spread” of jet fuel, which is the difference between crude oil and jet fuel prices, acute supply shortages tip the balance in favor of auto transport. This was demonstrated in the weeks following hurricanes Katrina and Rita in 2005, when major oil supply disruptions prompted refiners to focus their operations on producing gasoline.
With aviation accounting for only 12 percent of transportation fuel demand, the auto transportation sector will maintain a distinct market advantage over aviation. But with Renewable Fuel Standard mandates already difficult to meet, it is unlikely that the aviation industry will receive much federal support.
As such, the aviation industry may be fighting this battle on their own. The hope, of course, is that scalable biofuel technologies will make this decision moot.
[photo credit: wvs]