Avgas Economics 101

After I wrote about my visit to Swift Fuels, I received several notes asking why it would be so difficult to determine a price for the finished product. I have a good friend who runs an auction company and when I ask him what something is worth, he usually replies, “Whatever someone is willing to pay for it.”

To give you an example, crude oil is selling for around $100 a barrel. In some parts of the Middle East, it costs about $1 to produce a 42-gallon barrel of crude oil. At the new tar sands oil production facility in Canada, it costs well over $50 to produce a barrel of crude oil — but both will sell for a price based on $100 a barrel. The selling price varies based on the density and composition of the crude oil.

In the world, oil producers keep raising the price of crude until the volume tends to fall off. They then lower it a little to keep everyone buying. They do not want to kill the goose that lays the golden egg.

In the aviation fuel business, there are only a few oil companies producing 100LL. The price of 100LL is set by the cost of crude of, say, $2.50 a gallon plus refining costs, plus that of the lead. We have the added cost of batch blending for the 100LL. (Mogas is all inline blended so never sees a tank.)

Another cost is transportation. To ship mogas through a pipeline approximately 1,000 miles will only cost a penny or so per gallon. By comparison, 100LL must be sent by transport at a cost of about $3-$4 per mile, so this cost would be in the 50 cents a gallon range. Now add the liability and QA cost, plus maybe a little profit, and you start to understand where the rack price is based.

A couple of the oil companies sell branded product at FBOs, but quite a bit of the 100LL is sold through aviation fuel distributors. This gives the business some competitive pressure. When the FBOs buy their fuel, many of them add overhead costs plus base costs for their operations to the cost of the fuel at the pump. If you add all of this up, you start to understand why the price of 100LL is where it is today.

If Swift or someone else develops a 100 lean rating unleaded fuel, one of two things will happen. First, if 100LL is still available, very few pilots will buy the new fuel, especially if the 100LL is much lower in price. The second thing would be if 100LL is outlawed, then the Swift fuel could be the only fuel that would satisfy the octane requirements of most large engine aircraft.

Swift may be an aviation-friendly company, but it will need to partner with some other fuel production companies. Now let me see, we have a bean counter at a large company who is in charge of setting the price for a product that has no competition. I wonder where he will set the price?

Or put another way, how much are you willing to pay for the only fuel available that will work in your airplane? The problem here is we may find out.

 Ben Visser is an aviation fuels and lubricants expert who spent 33 years with Shell Oil. He has been a private pilot since 1985. You can contact him at Visser@GeneralAviationNews.com.

 

 

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Comments

  1. Gmfly4kix says

    Regarding 100LL; The industry consensus IS 100LL will no
    longer be available in the not so distant future, due to tetraethyl lead content. A major
    discussion within the industry has included a “transition period”.
    The transition period logistics will have to include both 100+ octane fuels
    (leaded and unleaded), thus causing a temporary price differential Mr. Visser
    speaks of. With 100LL no longer  available,
    the replacement unleaded avgas production would increase. This increase of
    production on its own would lower the end cost, as well competition among  FBO’s and their distributors. Also, all of the
    costs that were caused by the addition of tetraethyl lead (including refinery
    cleaning) would be eliminated. This would include no more costs due to keeping
    lead contamination out of other fuels, from the suppliers pipelines or delivery
    trucks.

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  1. [...] After I wrote about my visit to Swift Fuels, I received several notes asking why it would be so difficult to determine a price for the finished product. I have a good friend who runs an auction company and when I ask him what something is worth, he usually replies, “Whatever someone is willing to pay for it.” Continue Reading » [...]

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