If Oil Is Cheaper, Why Isn't Avgas Cheaper, Too?
Earlier this week, as I was freshening the flowers in my patio shrine to Friedrich Engels, reader Will Alibrandi asked this perfectly reasonable question: If the price of oil has tumbled on the spot market, why hasn't the price of avgas come down?
The short answer is it has, you just haven't seen it yet. Or maybe it hasn't. It just depends. Is that confusing enough? If so, I apologize, but getting a handle on how the pricing of avgas works is like rounding up ball bearings with greasy gloves on. But as it happens, I did some research on this last week and can at least offer an informed opinion.
You've probably noticed that avgas prices tend to be less volatile than mogas prices, which sometimes seem to change once a day or more. There are several reasons for this, according to a distributor I know in the avgas business.
The single largest seems to be that avgas isn't traded as a commodity so there's no reported national price point for it. It is pegged to the price of premimum unleaded, but refineries treat it as a boutique product, they don't make much of it (compared to mogas) and, because they traditionally operate as self-contained business units, they set prices at will. That's one reason why avgas is more expensive—there's just less market-wide competition and with no readily available price point, refineries are free to set market-will-bear prices.
But two other factors figure in higher costs. One is the expense of buying and handling the tetraethyl lead used in avgas (plus other additives) and the other is transportation, which is either truck, rail or barge for avgas. Because of the lead and low volume, most pipelines don't handle avgas and pipelines are the most efficient way to transport anything that will flow through them.
But it's a different story with mogas and with Jet A. Both are traded on the New York Mercantile with prices on current contracts reported every day. Refiners, distributors and retails are therefore free to adjust prices accordingly and they generally do, which explains why the price of regular at the corner gas station goes up (and down) a dime over night. It has less to do with what the retailer paid for the gas in his tanks than what its perceived market value is at the moment. The more volatile the market—as it was this summer—the more often prices change. Mogas prices seem to fluctuate more readily upward than downward and part of this has to do with volume. A busy service station may take several loads of gas a week, all at different prices.
Avgas tends to be more price-stable because if an FBO buys a load at a certain price and sets his margin—say $1.25 above wholesale—he's likely to retain the price until he buys the next load. "But these little airports have to be careful," one fuel distributor told us, "because if they don't move up with the market swings they can be behind enough not to have enough money to pay for the next load."
As of late September, my distributor source told me 100LL was wholesaling on the east coast for $4, including delivery and taxes. As of this weekend, the refinery price dropped to $3.50 in this region, although it's different elsewhere, I'm sure. That means the cheapest avgas retailers are seeing margins of about a buck to $1.50, compared to 15 cents or a little more for mogas retailers, before credit card and other fees. Sounds like a lot, but for many FBOs, avgas sales are the only revenue and as prices rise, sales decline. But FBOs still have to pay the bills and the cost of doing business on an airport continues to rise. So let's not beat up on the FBOs too much. Being in that business has always been tougher and it's not getting any easier.
Oh, and the-we've-got-plenty-of-oil argument surfaced again this week in our little blogosphere, as it always seems to. Reader Samuel McCauley, who identifies himself as a "life-long oil man" raised the issue. The basic argument is that if the regulators would just get out of way, the U.S. is sitting on hundreds of years worth of oil. It's actually not hard to support this argument in some way with genuine facts. Google around a little and you'll find competent writing on the subject, much of it centered on vast shale kerogen deposits in Colorado and other intermountain states, plus offshore deposits on the coasts, which are more iffy. I've been covering this since the 1970s and for just as long, the oil industry has been arguing about the size and economic recovery of these reserves. At some point, they do become economically recoverable and with as much as a trillion barrels in estimated shale reserves, the total makes Saudi Arabia look puny.
Unfortunately, both the technology and economics of large scale shale oil production remain unproven and will probably remain so for a decade, at least. Even if regulators stepped aside entirely—something I'm not sure the public really supports at this juncture--that will still be true. Meanwhile, the elephant in the room is 20 million barrels of U.S. consumption a day, 12 million of it imported. Just for reference, the U.S. imports about 2 million more barrels than Saudi Arabia produces each day. If we made Saudi the 51st state, we would still have to import oil.
That's why I remain convinced that until shale, tar sands and new offshore reserves come into play (if they ever do), a sustained effort to improve vehicle efficiency—something that's readily within reach—is the only short term solution that can make substantial gains. But before we can even consider that, we have to at least be able to have a civil conversation on the subject. Thus far, that has eluded us all.