How Does the Price of Oil Affect the Price of Sustainable Aviation Fuels?




1. Has the coronavirus caused a drop in demand in the aviation industry?

Which came first: the chicken or the egg? Have structural changes led to a drop in demand in the aviation industry? Instead, has the coronavirus led to a drop in demand for flights? That is hard to say. Most likely, the two factors influenced each other. What is certain is that air traffic was at an unprecented high before the outbreak of the coronavirus. In addition, the world economy was preparing for a downturn. It was only a matter of time before a turnaround would happen. 

The coronavirus is adding fuel to the fire. Coronavirus rocked the economy and brought to light what otherwise would have taken a few quarters to reveal. Or it could have been the only factor escalating the economic problems. One event of many that rose from the abyss and encompassed world economic growth. 

The demand for air travel is likely to lag behind expectations in the medium term. Long-term expectations for air travel demand are difficult to decide. Other factors need to be taken into account, such as demographics in Western countries. Take Germany as an example. Here we are dealing with a nation known for its love of traveling to distant lands for vacation and pleasure. But since the coronavirus emerged, we’ve seen another trend permeating German economic life.

The German economy is on the verge of a tidal shift that will influence consumer behavior at home and abroad. This is the time when everything starts to change, especially in the energy markets. Germany has had its place in the sun and exported goods far and wide. This was made possible by a thrifty population who also liked to travel. In fact, Germans like to save up to give themselves the opportunity to travel to distant countries. But now that the coronavirus has emerged, savings and bank accounts no longer seem to be enough to bridge them until retirement. For Germans, it is also a chance to fill the financial gap in their own lives.

Germans, just like other Europeans, are holding back on travel not only because of the coronavirus. There are deeper reasons, such as demographics, that are long-term trends. They are difficult to mitigate. Of course, the coronavirus and travel restrictions play an important role. But they give us only a partial perspective. They are only half the explanation for the decline in demand for air travel.

2. What impact will coronavirus have on sustainable aviation fuels?

It is a fine line between crude oil and sustainable aviation fuels. They balance their weight. The stronger, more mature player is oil. A pendulum swing can set sustainable aviation fuels in motion. While one player skillfully balances his or her weight, the other player must find his middle ground. Sustainable aviation fuel can be easily unbalanced by pressures in the oil market. In a way, sustainable aviation fuel cannot stand on its own two feet.

Subsidies are the fuel for sustainability. Without subsidies, these biogenic fuels would be crushed under the oppressive yoke of high-energy, easy-to-produce hydrocarbons. With the collapse in oil prices at the start of the 2008 financial crisis, a feeling of uneasiness has spread across the biofuel industry. Biofuels need high oil prices to justify their costs. Biofuels need high oil prices to justify their costs.It is an immense undertaking to switch from fossil fuels to biofuels.

For example, biofuels need to be collected from many different sources. The logistics are substantial. Great efforts must be made to bring these sources together. Even then, the fuel must be further refined to be suitable for transportation. The process of converting biomass into fuel is in and of itself an energy-intensive process. This leads to additional operating costs that are regularly incurred.

This is of course reflected in the price of biofuel. Because of the lower Energy Return on Investment (EROI) of biofuels and their lower energy density and lower calorific value, biofuels then need subsidies to stay competitive with fossil fuels. In addition, an entire industry has been built to meet the needs of the fossil fuel industry.

Fossil fuels therefore benefit from economies of scale, a much higher energy return and a finely tuned supply chain. All of this speaks in favor of fossil fuels when oil prices are low. Sustainable aviation fuels are currently more of a substitute when oil prices are particularly high. The same applies to the Canadian oil sands. Canadian oil sands are a substitute for conventional oil at higher prices.

In only a few cases are biofuels more efficient to burn than fossil fuels and diesel. This is especially true for recycled plastics. Interestingly, recycled plastics may be uniquely well suited for sustainable fuel production. They were already made from fossil fuels. It is easier to separate the biodiesel etc. from other residues than to produce fuel from municipal waste fractions. Not every waste product or every biomass source is equally suitable to produce biofuels or kerosene. On the other hand, one of the main advantages of biofuels is that they are often viewed as cleaner fuels with fewer sulfur and dioxin emissions.

3. Do sustainable aviation fuels still stand a chance against kerosene?

This generally depends on two factors. One factor is that funding and investment in new biofuel startups and projects has dried up. This has also meant that innovation in new biofuel technologies has slowed over the past decade. Investment in the biofuels industry has lagged behind the levels we saw in the run-up to the 2008 financial crisis. But investment is slowly recovering, and recently there have been major attempts by chemical and oil companies to invest in the biofuels sector.

Sustainable aviation fuel is no exception and is likely to be affected in the same way as other biofuels. It has to be said that the demand for sustainable aviation fuel may be more sensitive to supply and demand factors, even more so than other biofuels. This may be because the aviation industry uses sustainable aviation fuels while the transport sector uses traditional biodiesel for road transport. Biodiesel may be particularly suitable in rural areas and can contribute to a decentralized energy system. Biodiesel may be an attractive option for countries with few high quality energy resources. For which countries could biofuels be an option? For example countries like Germany, but probably more for Brazil.

Sustainable aviation biofuels depend on the price of oil. Prolonged periods of high oil prices should have a positive impact on investments in the biofuels industry. Sustainable biofuels for aviation should benefit from this. As we have seen an extended period in which investment in biofuels has been below previous levels, interest in algae biofuels and other innovative solutions for producing biodiesel should increase. Prices bottomed out in the first and second quarters of last year, which means oil prices are expected to rise from now on. We will see where this trend takes us, but it is likely that oil prices will favor oil exporters. As a result, oil importers will want to diversify their offerings.

4. Conclusion

Global oil markets are expected to experience major upheaval over the next decade. This need not be taken for granted, although oil prices have long been exceptionally low. Oil prices have been so low that it may seem difficult to justify the costs of extracting and processing oil. Much of the cost of getting oil to market is a fixed cost in the midstream oil business. These costs arise repeatedly. Oil is a commodity that really benefits from economies of scale. This is reflected in the current market environment.

Logistics is becoming more and more expensive. Markets are relatively liquid, but it is sometimes difficult to get oil tankers to move crude oil to where it is needed. Why is that? One reason for this is that supply chains have been disrupted by the coronavirus crisis. We can think of maritime transport as a bus system whose ports look like interlocking bus stops on a street. Now let’s imagine that some stops are omitted or that there is a road block somewhere. There will be a backlog and everyone will wait. We may have the money to pay for the bus ticket, but that doesn’t mean the bus will come early to pick us up. It works similarly in the energy world.

Logistics costs will ripple through the system and increase the price we pay at the gas station. Eventually, oil companies will be more interested in biodiesel as a substitute. The main concern is that sustainable aviation fuel may remain subdued for a long time. That may be because kerosene, generally speaking, is a residual. The main focus is on gasoline. 

It is always helpful to do some mental math to have a rough idea of ​​where energy prices will be. Without considering different prospects we fly blind. Price movements are particularly difficult to spot. Your future is hidden behind a shadow, a fog that we slowly uncover as we slide through time. But here and there we get glimpses of what is to come. If we look closely, we perceive the shape of the world inside and out.

Many thanks for the shared interest in the energy world!

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