Oil up as Bulls Eye Summer Flights Amid Debate Over Gasoline Prices

By Barani Krishnan

AiVIF.com -- It’s either this or that. With the debate over road travel growing as gasoline sells at around $5 a gallon, oil bulls have turned their attention to summer flights as refining margins for jet fuel hit all-time highs.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled up $1.09, or 1%, at $110.65 per barrel. It had risen more than 2% earlier in the session, reaching an intraday high of $111.16.

London-traded Brent crude, the global benchmark for oil, was up 15 cents to $114.28 by 2:45 PM ET (18:45 GMT), after a session peak at $116.24.

Oil bulls are trying to shake off the worst selloff in two months that sent WTI down 9% last week and Brent 8% lower amid fears of a U.S. recession that could bite demand for oil.

“Regardless of the reason for the selloff, prices have rebounded this morning and led by products as jet and gasoil margins are making new all time highs,” Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, said in an email to AiVIF.com.

UBS analyst Giovanni Staunovo made a similar point, saying that despite concerns over economic growth, latest data on flight activity and mobility on U.S. roads continues to show solid oil demand.

“We expect oil demand to improve further, benefiting from the reopening of China, summer travel in the northern hemisphere and the weather getting warmer in the Middle East. With supply growth lagging demand growth over the coming months, we continue to expect higher oil prices,” Staunovo said in remarks carried by Reuters.

Air travel industry portal AviationPros said airlines were expected to consume 321 billion liters of fuel in 2022 compared with the 359 billion in 2019.

“At $192 billion, fuel is the industry’s largest cost item in 2022,” it said, adding that it accounted for 24% of overall costs, up from 19% in 2021. “This is based on an expected average price for Brent crude of $101.2/barrel and $125.5 for jet kerosene.”

But while fuel will account for about a quarter of costs in 2022, a particular feature of this year’s fuel market was the high spread between crude and jet fuel prices, AviationPros noted.

“This jet crack spread remains well above historical norms, mostly owing to capacity constraints at refineries,” it said. “Under-investments in this area could mean that the spread remains elevated into 2023. At the same time, high oil and fuel prices are likely to see airlines improve their fuel efficiency — both through the use of more efficient aircraft and through operational decisions.”

The American Automobile Association, meanwhile, predicted that 47.9 million people will travel 50 miles or more from home over the U.S. Independence Day holiday weekend that begins on June 30 and stretches to July 4, which marks the National Day itself.

The AAA said its projections for miles traveled will be an increase of 3.7% over 2021, bringing travel volumes just shy of 2019 levels.

“The biggest surprise – car travel – will set a new record despite historically high gas prices with 42 million people hitting the road,” AAA said in a blog post. “With crowded roads and busy airports, AAA wants to prepare travelers so they can have a stress-free July 4th celebration.”

The debate over gasoline pricing — whether it’s high enough to result in demand destruction or remains within the affordability of the average American who’s flush with more savings now than in previous years of summer travel, thanks to the government’s pandemic-era aid — has been at the center of oil markets as a gallon at pumps holds stubbornly near $5.

The Biden administration said this week that it was studying more intently than ever its plan to introduce a gasoline tax holiday to make fuel more affordable for Americans.

On Monday, unleaded gasoline averaged at $4.98 a gallon across the United States, down from a record-breaking $5.01 on June 13, according to the American Automobile Association. The federal government taxes gasoline at 18.3 cents per gallon and diesel fuel at 24.3 cents per gallon.

A gas tax holiday would suspend those excise taxes for a certain, predetermined period of time. A number of states have already adopted or proposed a moratorium on statewide gas taxes. But so far, only a handful of state legislatures have adopted a gas tax holiday in one form or another, including Maryland, Georgia, Connecticut, New York and Florida.

The idea has also gained traction in Congress in recent months as the cost of consumer goods like food and clothing are also on the rise, putting pressure on consumers’ pockets from multiple directions. Several different versions of a federal gas tax holiday have been proposed in both the House and the Senate – one of which would suspend the tax through the remainder of 2022 – but have yet to pass both chambers.

President Joe Biden affirmed on Monday that it was his “hope to have a decision, based on the data I’m looking for, by the end of the week.”

Treasury Secretary Janet Yellen also said a federal gas tax holiday is “worth considering,” adding that the Biden administration was willing to work with Congress on the issue.

But others in the Biden administration have been more reserved about the possibility of a federal gas holiday and how it could impact revenues needed for projects like road repairs. That includes Biden’s own energy czar Energy Secretary Jennifer Granholm.

"Part of the challenge with the gas tax, of course, is that it funds the roads, and we just did a big infrastructure bill to help fund the roads," Granholm said on CNN’s “State of the Union” on Sunday. “So if we remove the gas tax, that takes away the funding that was just passed by Congress to be able to do that."

Granholm is not the only person to warn that a federal moratorium on gas taxes could have negative, unforeseen impacts on Americans.

University of Pennsylvania’s Wharton School said in a study that many factors affect the retail prices of gasoline, including the cost of crude oil, refining and distribution costs and profits as well as taxes.

“In the case of gas tax holiday, suppliers can capture part of the economic benefit of the tax reduction if pump prices do not fall by the full amount of the suspended tax,” the Wharton study said, adding: “That could happen if the 'demand elasticity' (consumer flexibility) for gasoline is quite low, giving suppliers more opportunity to capture the benefits of the tax cut.”

This basically means that it’s in the hands of fuel wholesalers to pass the cost down to consumers. At present, there’s no guarantee that they will, personal finance site Kiplinger said in a blog posted on Thursday.

“There's some concern that the oil companies wouldn't pass along all the savings to consumers if the federal gas tax was suspended,” Kiplinger said. “The current bill in Congress addresses this issue by stating that the 'policy of Congress' is that 'consumers immediately receive the benefit of the reduction in taxes' and that 'transportation motor fuels producers and other dealers take such actions as necessary to reduce transportation motor fuels prices to reflect such reduction.' However, the policy has no teeth.”

Kiplinger says there's only a weak enforcement clause that permits the U.S. Treasury Department to "use all applicable authorities to ensure that the benefit of the reduction in taxes…is received by consumers." There are no specific fines or other penalties for failing to abide by the law.

The Committee for a Responsible Federal Budget, meanwhile, said in a report released in February that a federal gas tax holiday could reduce gas tax revenues by up to $20 billion, depending on when and how the moratorium is enforced.

“While the gas tax holiday may reduce prices at the pump, it will further increase demand for gasoline and other goods and services at a time when the economy has little capacity to absorb it,” the committee said in part. “The result could be even higher rates of inflation in 2023.”