While gasoline demand, helped by lower-than-historical average prices at the pump, will play a key role in oil demand growth pertaining to the rebalancing of the global oil market an often-ignored category of the refined product market that is also expected to contribute will be jet fuel, even as airlines get more fuel efficient, according to analysts.

In the long run, there may be a degree of petroleum substitution by airlines (i.e. renewable jet fuel and potentially hydrogen), but for now, even with efficiency gains, jet fuel—like on-road gasoline—remains an important growth driver for global oil demand.

“[J]et fuel is growing faster worldwide than overall oil demand, and this growth curve looks sustainable over the next five to 10 years,” Pavel Molchanov, analyst for Raymond James & Associates Inc., observed in a note to clients recently.

“At the same time, there is no denying the fact that airlines—like all large transportation enterprises—are becoming more fuel-efficient, a result of engineering changes, as well as more efficient operating practices,” Molchanov said.

Jet fuel is no longer growing more than five times as fast as the overall oil market, but Molchanov pointed out that it is still faster than average. Between 1980 and 2000, the global jet fuel market (in bbl terms) jumped 157%, during a period when global oil demand was up only 22%. The staggering growth of commercial aviation during the 1980s and 1990s, particularly in emerging markets as post-reform China, according to Molchanov, explains the wide disparity between those two numbers.

“In 1980, jet fuel accounted for a mere 2.8% of global oil demand. By 2000, that proportion more than doubled to 5.9%. More recent history looks quite different. From 2000 through the present, the global jet fuel market increased 25%, modestly faster than the 22% growth in overall oil demand,” Molchanov said.

“Interestingly, though, during the 2000s the growth rates were essentially equal. Since 2010, jet fuel again ‘broke out’ from the pack, growing about 1.5 times faster than the overall market. Jet fuel accounts for around 5.7 million bbl/d of 2015 oil demand. Even if this comparison is somewhat meaningless, it’s interesting to note that jet fuel—if it were a country—would be ranked third, behind only the U.S. and China,” he noted.

In comparing the underlying growth rates of commercial aviation versus road transport, one inherent difficulty is that reliable data for emerging markets is hard to come by. But, it is clear that aviation travel is growing faster than road travel even in developed economies, Molchanov observed.

For example, the U.S. Department of Transportation reports that U.S. vehicles miles-traveled (VMT) has risen0.2% from 2007 to 2014. According to The Boeing Co., airline passenger traffic within North America rose 0.7% during this period—still a small increase, but well ahead of VMT.

“While VMT are up sharply (+3.6%) in 2015 given that ultra-cheap fuel creates unusually easy year-over-year comparisons, the long-term growth rate is unlikely to be above 1% (on par with U.S. population growth),” Molchanov said.

“By comparison, Boeing’s 2014-2034 forecast for North American passenger traffic is 2.4% annualized growth. Globally, Boeing projects annualized growth of 4.9%,” he noted.

Fuel efficiency ≠ rising fuel consumption
One would ask: If global passenger traffic does indeed grow at close to 5% annually over the next 20 years, does that mean that jet fuel demand will also increase 5% annually? Sadly, for oil producers, the answer is no.

Molchanov expects jet fuel consumption to grow at a modestly faster pace than overall oil demand.

“In general, we look at 1% as a realistic average growth rate for global oil demand over the 2017-2025 timeframe. In 2016, demand growth is likely to be above-average, close to 1.5%, though not as rapid as the 2015 level of more than 2%,” he said.

“Taking 1% as a base, we think that jet fuel growth will average between 1.3% and 1.6%,” Molchanov pointed out. “This would imply that jet fuel’s share of the overall oil market will expand to reach 7% by 2025.”

The main reason airline fuel consumption is certain to grow at a slower pace than passenger traffic, Molchanov said, is, quite simply, fuel efficiency. In this sense, it is comparable to what is visible in the on-road transportation vehicle market due to government regulations such as mandated Corporate Average Fuel Economy (CAFE) standards in the U.S. and analogous mandates in the EU and elsewhere.

“While these types of vehicle regulations do not directly cover commercial aircraft, aircraft manufacturers are implementing their own engineering changes to achieve better fuel economy, on purely economic grounds,” Molchanov said.

An example of this is aircraft manufacturers like Boeing and others that are incorporating weight reduction measures using ultra-light composite materials and operational changes (such as limiting airspeed, etc.).

“As a broad premise, energy investors should not overlook the relevance of demand for rebalancing the global oil market,” Molchanov concluded.

Bryan Sims can be reached at bsims@hartenergy.com.

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