Demand for air travel is expected to double in the next two decades and grow by almost four percent each year. This sharp increase is in part the result of greater globalization, but also strong economic growth and an expanding middle class in the Asia-Pacific region. In 2016, some 3.7 billion passengers traveled by commercial planes, and every year, more than half of the world’s tourists who cross international borders do so by air. Just like consumer demand for road transport, growth will be fueled by emerging markets, and China is poised to exceed the U.S. as the top country for air travel in the middle of the 2020s.
Demand for air travel is expected to double in the next two decades.
In this context, the rapid growth in the use of jet fuel will have major implications for global oil markets. Jet fuel demand growth appears guaranteed in coming decades with increased aviation travel and limited substitutes in this area. Jet fuel will support oil demand growth for some time since it cannot be easily displaced, and it will compete with the growing needs in road transport.
Demand for jet fuel—a middle distillate similar to diesel and kerosene—has been one of the strongest performers among transportation fuels in recent years, as the number of passenger flights has increased. The U.S. Energy Information Administration (EIA) expects jet fuel demand growth to outpace all other petroleum products in the next couple of decades and for the total to double by 2040. The International Energy Agency (IEA) says that in its “New Policies Scenario”—which assumes governments will follow through on environmental commitments—jet fuel demand rises by more than 50 percent to above 9 million barrels per day (Mbd) by 2040. However, without improvements in efficiency, demand could reach 15 Mbd. That would put jet fuel demand at approximately 13 percent of global oil demand, up from about six percent now.
Without improvements in efficiency, jet fuel demand could reach 15 Mbd by 2040, up from 6 Mbd now.
In the OECD, jet fuel demand will clearly be the strongest growing for any petroleum product. The rise of electric vehicles and stricter fuel economy standards should limit growth in gasoline consumption. The first electric commercial aircraft, however, is not likely before 2040, according to the International Air Transport Association (IATA). In trucking, electrification will not likely be as prevalent as in passenger cars, but natural gas can work as an inexpensive substitute for diesel. The EIA, in fact, sees OECD gasoline and diesel consumption falling through 2040, while jet fuel will almost double (see below).
In developing countries, jet fuel growth will add to an already competitive marketplace for petroleum products. All transportation fuels will continue to grow as personal and business travel more than offset increased efficiency and the use of alternative vehicles. Against this backdrop, refiners will have to increase capacity to meet strong demand growth all across the transportation sector.
Alternatives in aviation
In contrast to ground transport, aviation does not have large-scale cost-competitive alternatives. But given the daunting challenges of the aviation industry to meet growing demand, there have been increasing efforts to make advanced aviation biofuels commercially viable. Only a fraction of commercial flights run on alternative fuels. In order for an airline to utilize an alternative fuel, it must meet several requirements, increasing the difficulty of finding viable substitutes. First, it has to be safely mixed with conventional jet fuel and it cannot require a change in the aircraft or engines. Second, it has to meet the same technical specifications as regular jet fuel. Lastly, it has to meet environmental goals, and industry does not want alternatives to compete with food products or cause deforestation.
In contrast to ground transport, aviation does not have large-scale cost-competitive alternatives.
There has been success in this area. A decade ago, Virgin Atlantic successfully tested biofuels (coconut oil and babassu oil) in one of its engines, and since 2011, a number of airlines have used biofuels made from sugarcane, cooking oil, algae, and other sources in commercial flights. In late 2016, United began using alternative jet fuel in its daily operations at Los Angeles International Airport (LAX) and signed a contract to purchase and consume approximately 15 million gallons of biofuel over a three-year period in the same way as it uses traditional jet fuel. Perhaps the biggest promise in using alternatives in aviation has come in the U.S. military—the Navy operates some flights on 100 percent alternative fuels.
Even though industry has made progress in this area, it has hardly gone beyond the experimentation stage. At the end of last year, the industry reached 100,000 commercial flights that used alternative fuels. That number may seem high, but not when put in context of the bigger picture: There were more than 38 million flights globally in 2017.
“Biofuels are trying to penetrate the jet fuel market, but not as much as motor fuels,” John Auers of refining consultancy Turner, Mason & Co. told The Fuse. “Jet buyers are more reluctant to experiment, since they have a lot more to lose if there is a problem with the engine.”
By the look of current trends and forecasts, it stands to reason that fuel demand in aviation will continue to grow for decades to come. At the same time, road demand will also likely rise for some time even with increased electrification and stricter fuel economy. On top of that, transportation will have to compete with petrochemicals, which also have limited substitutes. This combination portends strong growth in global oil demand for the foreseeable future.