Fuel 101: From Well to Wing

From Fossil to Fuel

Petroleum, or crude oil, is a hydrocarbon (a chemical compound containing hydrogen and carbon) that can be distilled into gasoline, kerosene, oils and waxes. Hydrocarbons are formed from large deposits of decomposed plant and animal matter. The best environments for the production of petroleum are restricted basins of water, such as oceans or lake bottoms, where there is little or no water circulation. Petroleum, which is squeezed out of decomposing micro-organisms as sediment, becomes increasingly compacted over time. This process takes billions of years and occurs in large quantities in certain regions of the world.

Once extracted from the ground, oil is transported to refineries in the United States via pipeline, oceangoing tanker or barge. The United States buys oil from a globally diverse group of suppliers, including private domestic producers from Alaska to Louisiana, as well as a mix of private and state-owned suppliers in nations such as Kuwait, Mexico, Russia, Canada and Venezuela. With increasing demand throughout the economy and limited access to domestic supplies, U.S. consumers must rely on foreign suppliers to make up the difference.

The standard barrel contains 42 U.S. gallons of crude oil, but the refinement of a typical barrel results in more than 44 gallons of petroleum products because there is a reduction in the density of some of the original crude oil as different petroleum products are created. Of the resultant products, jet fuel usually represents only 9 to 10 percent. Other products include motor gasoline, distillate fuel oil, still gas, petroleum coke, liquefied refinery gas, asphalt and road oil, various oils for foodstocks, lubricants, special napthas, kerosene, waxes and an assortment of other miscellaneous products.

After it is refined, jet fuel travels by pipeline to storage sites, airports or fuel terminals where it is distributed by truck, barge or pipeline. Once it reaches the airport, fuel is distributed in a variety of ways. Some airports have internal hydrant systems that carry fuel from a storage site at or near the airport, then under ground to the terminal gates, where hoses span the final distance to the wing of the airplane. At airports without such systems, refueling trucks are used to move fuel from the storage site to the aircraft.

Accommodating Growth in Demand

The price of crude oil has risen in recent years, because worldwide demand has increased in response to global economic growth – and supply has not fully kept pace. Global oil demand is currently averaging 87 million barrels (over 3.6 billion gallons) per day. Supply disruptions are occurring due to military conflict and civil unrest in various parts of the world, as well as surging demand in China, India and other emerging markets.

Producers sell oil through a variety of arrangements, including private bilateral contracts and market contracts that are priced through a commodity exchange. Air carriers buy fuel from multiple suppliers and at differing rates. Not every supplier operates at every domestic airport that a carrier may serve, so multiple arrangements are necessary. Since airline schedules make fuel demand generally predictable, carriers can purchase fuel months or years in advance in order to receive a discounted rate from the supplier.

Locking in the prevailing price for future deliveries of a commodity like jet fuel is called a hedge. Hedging allows airlines to limit the uncertainty over future costs by mitigating volatility and improving financial planning. However, hedging is a gamble that requires a relatively healthy financial condition, a willing counter-party and often a sizable upfront transaction cost. This makes hedging an increasingly difficult proposition for many carriers. Hedging also can be financially risky, because an airline could find itself locked into paying more for fuel if the market price drops below what it has agreed to pay in the hedge contract. As Standard & Poor's remarked in a March 28, 2008 research note, "The U.S. airlines...have a relatively low proprotion of their 2008 fuel needs hedged, because hedging high and volatile fuel prices is expensive and may require posting cash collateral."

The Cost of Doing Business

Labor and fuel are the two largest expenses for all U.S. airlines, with fuel currently constituting one third of the industry's operating costs. Several factors contribute to the price of jet fuel, which historically has tracked the price of crude oil. Those factors include: difficulties in refinery operations; environmental regulations; surges in regional demand; seasonal swings in demand,  supply disruptions caused by natural disasters, military conflict or geopolitical events; and market speculation.

The difference between crude oil and jet fuel prices, commonly known as the "crack spread," historically averaged about $5 per barrel. In the weeks following hurricanes Katrina and Rita in 2005, however, the crack spread widened dramatically when major oil supply disruptions prompted refiners to focus their operations on producing gasoline. As a result, airline demand for fuel far exceeded the available supply, causing the spot price of jet fuel to spike at more than double the spot price of oil. At its peak, the crack spread added the equivalent of $60 per barrel to the final cost of jet fuel, which surged to $131.47 in the Gulf Coast on October 5, 2005.

Just as motorists pay different prices for gasoline in different parts of the country, airlines pay different prices regionally for jet fuel. West Coast prices traditionally run higher, because of limited refining capacity as well as inferior storage, logistics and distribution capabilities. In addition to the mountainous terrain, which limits trucking capability, the West Coast lacks the more robust pipeline network of the East, although the latter is becoming increasingly strained by today’s demand and competing product needs (i.e., gasoline vs. diesel vs. jet). Much of the product on the West Coast is imported, often from countries with even higher prices.

Airlines constantly strive to improve jet fuel efficiency, because unlike other modes of transport, they have no alternative source of energy. Airlines conserve fuel in many different ways, including reducing and more accurately measuring onboard weight; cruising longer at higher altitudes; employing greater use of flight-management systems; and conducting more in-depth analyses of weather conditions. In addition, airlines are modernizing their fleets with more fuel-efficient airplanes; investing in winglets to reduce aircraft drag and thereby increase fuel conservation; redesigning hubs and schedules to alleviate congestion; and pooling resources to purchase fuel in bulk through alliances with other carriers. It also is important to note that the FAA "NextGen" suite of solutions could improve system fuel efficiency by as much as 15 percent.

Airlines are currently monitoring the potential to utilize synthetic jet fuel currently employed in some parts of the world. While there are many questions that need to be addressed about the widespread use of synthetic fuels to propel commercial aircraft in the United States, ATA is encouraged by efforts by the Department of Defense, NASA, the Federal Aviation Administration, airframe and engine manufacturers, and academic institutions to bring synthetic fuels to the marketplace. Any incremental fuel supply, especially if both environmentally friendly and economically viable, is something worth pursuing.

Did You Know?

• Determining how much fuel is needed for a particular flight involves a variety of factors such as aircraft type, passenger load, cargo, weather conditions and route length. Every aircraft is required to carry enough fuel to reach its destination, or reach a pre-determined alternate airport and still be able to fly for an additional 45 minutes.
• There are limits both for how much an aircraft can weigh to take off and land. All else equal, fuel efficiency increases with altitude; every aircraft type consumes fuel at a different rate. Occasionally, an aircraft will carry more fuel than is needed for a particular flight either because fuel is more expensive at an intermediate stop, or because “ballast” is required to provide correct weight and balance.
• Winglets, those vertical fins at the ends of the wings, make airplane wings more aerodynamic, cut fuel consumption between three and five percent, saving more than 100,000 gallons of fuel per aircraft per year while reducing noise and emissions.
• Jet fuel is linked to the commodities markets principally through home heating oil, a refined product similar in consistency. Because home heating oil is traded on public exchanges, it is often used as a reference to price jet fuel – when the price of heating oil rises, so does the price of jet fuel. The inverse is also true, in that jet fuel prices often move heating oil prices.
• Jet A and Jet A-1 are kerosene grades of fuel for aircraft powered by turbine engines. Jet A is the most commonly used fuel for commercial airplanes and has a maximum freezing point of -40°F; Jet A-1 has a maximum freezing point of -53°F to meet the low-temperature requirements of long, high-altitude flights. Jet A and Jet A-1 have a high flash point (100° F), making them relatively stable fuel types.
• A Boeing 737-700 can hold close to 6,900 gallons of jet fuel and fly 3,400 nautical miles; a Boeing 767-300ER can hold close to 24,000 gallons of jet fuel and fly 6,100 nautical miles.
• About 50 percent of our petroleum imports are from countries in the Western Hemisphere, with 19 percent from the Persian Gulf, 18 percent from Africa and 13 percent from other regions.
• The United States consumes more than 20 million barrels (840 million gallons) of petroleum products each day, almost half in the form of gasoline used in more than 200 million motor vehicles with combined travel of more than seven billion miles per day.
• In 2007, U.S. refineries produced approximately 1.44 million barrels of jet fuel per day; U.S. consumers utilized approximately 1.63 million barrels per day. Globally, more than 5.1 million barrels of jet fuel were consumed per day.
• The U.S. Air Force consumes over 60 million barrels (or 2.5 billion gallons) of aviation fuel annually, about 42 percent of which supports aviation mobility.