Travelers Brace for Rising Airline Fares
Crude oil is the lifeblood of the global economy. Here in the U.S., it’s our No. 1 source of energy. On average, crude oil supplies about 38% of our total energy consumption. Crude oil is ultimately refined into gasoline, diesel fuel, jet fuel and heating oil, among many others.
On Feb. 28, President Trump and Israel launched a military campaign against Iran targeting its leadership, nuclear facilities and military infrastructure. In response, Iran has effectively shut down the neighboring Strait of Hormuz, a critical waterway for the transportation of crude oil out of the Middle East region. The Middle East produces 30% of the world’s total crude oil. Each year, roughly 25% of the world’s total crude oil produced passes through the Strait of Hormuz in ocean-going cargo ships. Many energy analysts classify Iran’s closure of the Strait of Hormuz as the largest crude oil supply shutdown in history.
Iran’s goal is to send global crude oil prices soaring. Since Feb. 28, the price for a barrel of West Texas Intermediate – the benchmark grade of crude oil produced in the U.S. – has risen 37%. During this same period, GasBuddy reports the average price for a gallon of regular gas in the U.S. has risen by 36%. But jet fuel prices have soared even higher. A lot higher.
Jet fuel is a highly-refined type of kerosene used by commercial airlines around the world. According to data from S&P Global, the price for a gallon of jet fuel rose from $2.24 on Feb. 27 to a four-year high of $4.96 on March 20. That’s a 121% increase.
Fuel and oil are the No. 1 cost for airlines, accounting for nearly 29% of all operating costs. Understandably, these higher costs typically get passed onto the consumer in the form of higher ticket prices. According to OAG Aviation, a leading aviation data provider, the average price for the lowest available airfare is now $465 for the week ending March 9. This is 14% higher from Jan. 1 and is up 24% from 12 months ago. If crude oil prices continue to rise, experts warn airline tickets will likely soar even higher.
The rise in airfares comes amid the approach of the U.S. summer travel season (June-August). According to the International Air Transport Association’s (IATA) latest report, global air traffic is expected to reach a record 5.2 billion people in 2026, up 4.4% from last year. In response to strong consumer demand for air travel, the IATA notes that airlines have increased their flight capacity by 5.2% so far this year.
But why has the rise in the price of jet fuel (+121%) vastly outpaced that of gasoline (+36%). Experts say that jet fuel is much more sensitive to disruptions in the supply of crude oil than gasoline or diesel fuel. First, not all crude oil is identical. Some crude oil has a higher viscosity (or thickness) than others. Think of high-viscosity fluids (like honey) vs. low-viscosity fluids such as water.
Jet fuel is produced from a higher-viscosity type of crude oil, often called heavy (or “sour”) crude. Unfortunately, this heavier type of sour crude is found predominantly in the Middle East region. According to the U.S. Energy Information Administration, 45% of the world’s crude oil that can be refined into jet fuel comes from Middle East oil fields.
By comparison, the crude oil produced in the U.S. tends to be lighter with a much lower viscosity. This type of crude oil is called light (or “sweet”) crude and is much more suitable for producing gasoline or diesel fuel.
Moreover, jet fuel has much stricter technical specifications than gasoline or diesel fuel. Due to highly controlled and regulated performance standards, jet fuel is harder to substitute or blend alternative fuels when supply tightens.
One month after the initial strikes against Iran, the Strait of Hormuz remains in a state of flux. Until some type of resolution is found, global energy prices, along with airline fares, will likely remain quite volatile.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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