Oil’s up to $118 a barrel, then down to $77, then back over $90. As of the writing of this newsletter on the morning of March 12, West Texas Intermediate (WTI) is $91.46, and Brent Crude is $96.87 a barrel. But that’s not the problem.

There is a cost to turn that crude oil into jet fuel. You’ve likely heard of it as the crack spread, or the difference in the price between oil and jet fuel per barrel. It is usually around $30 a barrel. As of yesterday, it is over $62 a barrel, down from a high of $85 as of one week ago.

That has driven average jet fuel prices in the U.S. briefly over $4/gal. That’s the average just across the U.S. Depending on where you are in the world (or even where you are in the country), the cost at the “pump” could be much different. So what is going on with jet fuel prices?

Crack spreads tend to widen with major spikes in oil prices. I’m not going to pretend to be anywhere near an oil expert, but there are a few things I’ve learned about the relationship between jet fuel and oil that can help us understand what’s happening with jet fuel. Since most of the available data lives in the U.S., particularly with jet fuel prices, we’ll focus on that.

Firstly, not all oil is equal. The United States is the largest producer of oil in the world, the majority being light sweet crude. This “Black Gold” or “Texas Tea”, as so aptly named in the famous show “The Beverly Hillbillies”, is not sweet to the taste at all (heard from a friend).

But the light sweet crude refers to the API gravity and sulfur content of the crude oil. Lighter is less dense oil (higher API gravity), while heavy oil is, well, heavier and denser. The lighter crude is easier to handle and refine into fuels such as gasoline, while much of the heavy crude requires more processing, but allows access to fuels down the hydrocarbon chain. Sour or sweet refers to the sulfur content.

To oversimplify, much of the oil in the U.S. is the light sweet variety, well-suited for gasoline. The refineries split (crack) it into the various fuels, jet fuel among them. However, for the refineries to extract jet fuel, they often mix a blend of oil to maximize efficiency (and profits). As of February, much of the heavier oils that made up that blend originated in the Middle East. You see where we’re going with this.

So input oil to the jet fuel refining process got expensive quickly. This leaves the refineries with a few options. They can find other heavy oil for the blends to create jet fuel, or they can adjust the portion of the crude that is cracked into jet fuel. Light sweet isn’t terrible at cracking jet fuel, but it is more efficient at producing gasoline.

The oil used to blend with light sweet was likely coming from the Middle East. That got especially expensive. There are other sources of the heavier oil, including Canada, Mexico, and the heaviest of all, Venezuela, but new supply chains must be created, particularly for those refineries on the East Coast. Additionally, refineries can adjust the priority of fuels and oils they crack from the barrel of crude oil to adjust to the market. Both of those options take time.

Point being, some of the oil that goes into refining jet fuel, based on the current recipes, has just become limited. Options exist, but those options take time to deploy. This drove the jet fuel crack spread to high levels, but also provides an option for them it to re-rationalize over time.

It’s not just the jet fuel market that is competing for these oil blends. Diesel fuel, in particular, is seeing high crack spreads, too. The refiners’ priority was on gasoline, and political pressures are likely to keep it there.

The crack spread is high, but retreating off of highs that were not a record. That jet fuel retreated even as oil continued to move up suggests some of the alternatives to Middle East oil are being considered for the refineries. That’s good for aviation. (as of this morning, sanctions on Russian oil have been relaxed, offering further relief for the jet fuel markets.)

That’s also where the good news ends.

At the expected objection of airlines, the risk today isn’t the price of jet fuel. Reports issued over the past week showing how much money airlines are destined to lose because jet fuel jumped ignore the reality that there are smart people at the airlines that don’t just throw up their hands and say “welp, that’s it, boys. Fuel is expensive, and there’s nothing we can do. Dust off the old Chapter 11 playbooks.”

They adapt. Not with fuel hedging, but with capacity and fleet management. Flights, once profitable, but now in the red with higher fuel prices can be cut. That could raise fares (note: before you think we are contradicting ourselves from last week’s newsletter, it is the capacity, not the fuel prices, that would raise fares. If fuel prices stay high and capacity is not reduced, fares would drop. There are good reasons airlines would continue to deploy money-losing capacity, and indeed they have done this consistently in the past. Ensuring market share is retained, especially to keep pressure on a particularly weak competitor, is a key reason.)

While the price of fuel is the most talked-about risk to aviation, there remain many more concerning risks. Those risks revolve around demand.

As part of the Widebody panel at ISTAT this week, it was pointed out that 18% of the global widebody capacity flies through Dubai, Doha, Abu Dhabi, or Kuwait City - and those aren’t the only airports affected. Dubai, in particular, has been targeted by drone strikes.

Consider that, for a second. One of the world’s busiest airports is being targeted (and hit!) by explosives. As long as that continues, no consistent travel can continue through the airport. It doesn’t take much for that to continue. Even slowing rates of attacks on Dubai would keep travelers away. While stocks of drones and missiles are reducing, so are the interceptors that used to shoot them down. Successful attacks on Dubai have increased in recent days, not decreased.

That cuts a deep hole in demand right in the middle of the long-haul air travel system. Even though other carriers are seeing a boon from the massive capacity reductions by Emirates, Etihad, and Qatar Airways, this event is very, very net negative to the industry.

Also, consider that the attacks are happening at these airports for reasons beyond Iran’s anger with its neighbors. Those airports are close enough to be hit. If Iran could hit other Western infrastructure, it certainly would. While that likely won’t come from a drone launched from Iran, it raises the risk everywhere. Any attack materializing within another country, whether involving aviation or not, is a risk the industry should consider.

And then there is the issue of oil. High oil prices will certainly impact aviation, but it’s not the airline’s finances that raise the red flags. It’s the impact of high oil prices on travel demand. Oil does a lot more than just push airplanes forward. High oil prices will have an inflationary impact on economies around the world. They could trigger a downturn. The risk to aviation isn’t necessarily expensive fuel; it’s what passengers do when everything else is suddenly more expensive and uncertain.

Speaking of uncertainty, it’s time to check back in with oil prices. What was $91.46 for a barrel of West Texas Intermediate as this newsletter was first being written is now $93.36. Brent is up from $96.87 to $98.61.

Things are changing. But it’s not those moves in oil prices we suggest be priced into future risk models. It’s that risk to passenger confidence and overall travel demand that suddenly needs to be included in the equation as a possibility.

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