Jet Fuel Tightens as Global Tensions Disrupt Supply Chains
The Australian aviation sector is facing significant uncertainty regarding future jet fuel supplies, as escalating global conflicts and subsequent supply restrictions from key exporters are driving up prices and complicating planning for airlines. The situation has placed a spotlight on the nation’s reliance on imported fuel and the fragility of international supply chains.
Malcolm Roberts, the head of the Australian Institute of Petroleum (AIP), expressed widespread concern within the industry. “Everyone is concerned about their access to fuel… everyone holding is on to fuel and trying to get it,” he stated. “We’re watching sources of supplies all across the region. And we’re watching China because they’re a predominant supplier of jet fuels.”
China, a primary source of jet fuel for Australia, has recently begun to curb its fuel exports. This decision is partly a consequence of supply disruptions emanating from the Middle East, stemming from ongoing conflict. For nations like Australia, which depend heavily on Chinese jet fuel, this move necessitates a frantic search for alternative supplies.
Dan Wang, director of Eurasia Group’s China team, noted the competitive scramble for fuel. Countries are “have to scramble for replacement cargoes from South Korea, Singapore, Malaysia, India, all chasing supply in the same shrinking pool.” This increased demand and reduced supply are expected to fuel inflationary pressures, potentially leading to fewer flights and a downturn in international tourism.
Australia’s annual jet fuel consumption stands at approximately 10 billion litres, with over 80 per cent of this volume being imported, according to AIP data. China is a significant contributor, supplying around 2.6 billion litres (32 per cent) annually. Singapore follows with 1.8 billion litres (23 per cent), and South Korea provides 1.4 billion litres (18 per cent). Other contributing nations include Malaysia and Taiwan.
Domestically, Australian refineries in Queensland and Geelong produce roughly 20 per cent of the nation’s total jet fuel requirement.
Contractual Security vs. Spot Market Volatility
Despite the global anxieties, current contractual obligations are largely being met. “We still can secure contracted supply,” confirmed Roberts. As of recent reports, 18 tankers had arrived, with an additional 33 scheduled, and no AIP members had reported unfulfilled contracts.
The immediate concern, however, lies with future procurements. “We’re exposed to those prices in the global market,” Roberts highlighted, pointing to the unpredictable nature of spot market pricing.
Infrastructure Minister Catherine King recently emphasised the interconnectedness of global systems and their inherent fragility. Speaking in Melbourne, she remarked on the “hourly impact on Gulf nations and its impact being felt across the globe.” The ripple effects are already evident, with airlines like Scandinavia’s SAS and Air New Zealand announcing thousands of flight cancellations due to the escalating fuel prices. While the Australian government has taken steps to alleviate pressure on motorists and truck drivers, the aviation industry continues to grapple with securing sufficient jet fuel for the coming months.
Air New Zealand has already signalled potential fare increases, introducing hikes of $NZ20 on short-haul international routes and $NZ90 on long-haul flights, with further adjustments possible.
Airlines typically manage their fuel procurement through two main avenues: forward contracts, which lock in prices for future deliveries, or the spot market for immediate needs. China’s export restrictions, designed to secure its domestic supply, have effectively constricted the spot market, introducing significant price uncertainty.
While Australia does not directly import oil from the Middle East, it is indirectly affected. Crude oil from countries like Saudi Arabia is often refined in China and Singapore before being supplied to Australia.
Current Reserves and Future Strategies
Currently, Australia maintains a strategic reserve of jet fuel, exceeding the government-mandated minimum stockholding obligation by 21 per cent. This amounts to over 800 million litres, sufficient for approximately 29 days of national consumption. Fuel supply routes between Sydney Airport, which accounts for a substantial 40 per cent of Australia’s jet fuel usage, and Singapore remain operational, with no immediate supply chain disruptions anticipated for at least the next six weeks.
However, a significant price shock is on the horizon. Singapore jet fuel prices have seen a dramatic surge, climbing from around $US92 a barrel in late February to highs of $220 at the onset of the conflict in early March. While prices have since moderated to approximately $197 a barrel, they remain double their pre-conflict levels.
Major Australian airlines have implemented hedging strategies to mitigate the impact of fuel price volatility. Qantas and Virgin Australia, in their recent half-yearly financial reports, indicated that they had hedged a significant portion of their fuel contracts for the remainder of the financial year, extending to June. Qantas has hedged 81 per cent of its fuel for the June half, though this figure excludes more volatile refining margins.
A Qantas spokesperson stated the airline is in communication with the government and major fuel suppliers, who have provided “a level of confidence about current jet fuel supplies in Australia.” The airline continues to monitor the situation closely due to the ongoing uncertainty surrounding the Middle East conflict and its potential ramifications for the jet fuel supply chain.
Virgin Australia, primarily a domestic carrier, has hedged 85 per cent of its fuel requirements. Its current flight schedules remain unaffected, and no decisions have been made regarding capacity adjustments in response to the fuel price spikes. The airline has received assurances from its fuel suppliers regarding its near-term needs.
Sydney Airport’s CEO, Scott Charlton, while confirming no direct reliance on Chinese fuel supply, highlighted the broader conversation around Australia’s fuel security. He stressed the importance of building greater resilience in the nation’s fuel supply infrastructure, including for aviation.
Looking towards a more sustainable future, Charlton suggested a long-term strategy to reduce the airlines’ dependence on imported fuels could involve a transition to low-emissions sustainable aviation fuel (SAF). SAF, derived from biomass, aims to lessen the environmental impact of flying. Despite mandates in Europe pushing for its adoption, progress in developing a domestic SAF industry in Australia has been slow.
“Australia already produces many of the feedstocks needed to make SAF, yet much of that material is exported overseas and processed into fuel that we then buy back,” Charlton noted. “Developing a domestic SAF industry would allow us to capture more of that value here at home, while strengthening our energy security.”
