The months-long closure of the Strait of Hormuz has led to severe fuel shortages around the globe, as companies battle to continue operations. Airlines have been hit hard as they struggle to obtain enough jet fuel to maintain their regular flight schedules.
The U.S.-Israeli war on Iran led to the closure of the Strait of Hormuz – a key trade corridor connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea, via which roughly 20 per cent of the world’s oil is transported when fully operational. Several months of closures have resulted in significant restrictions to energy trade, with many countries now facing severe fuel shortages.
In July, several European airlines announced that they were at risk of running out of jet fuel. Europe has turned to the United States and Asia for alternative fuel imports in recent months but continues to feel the strain of the shortages. The United Kingdom, France, and Germany are extremely vulnerable due to their heavy reliance on the Middle East for their fuel supplies.
In recent decades, several countries have reduced their refining activities in favour of a green transition, leaving them more susceptible to supply chain disruptions. Before the war, Europe relied on the Middle East for roughly half of its jet fuel imports. Iran has allowed limited fuel supplies through the Strait of Hormuz, but it is uncertain when normal trade will resume due to the ongoing conflict.
On 18th June, the consultancy Energy Aspects forecast a jet fuel supply deficit across Europe of almost 600,000 bpd in the third quarter of the year, compared to surpluses of around 116,000 bpd in the United States and 425,000 bpd in Asia-Pacific. Europe’s inventories totalled around 38 million barrels at the beginning of June, equivalent to roughly 30 days of its fuel demand. The International Energy Agency (IEA) made a similar estimate.
EU Energy Commissioner Dan Jorgensen said that the region could face jet fuel shortages near the end of the summer season but that Brussels plans to coordinate releases of national reserves as required. Several European countries have also turned to alternative suppliers to fill the gap.
The U.S., Nigeria, Canada, India and South Korea have all stepped in to provide Europe with jet fuel. Meanwhile, in Italy, refiners boosted jet fuel production by around 10 per cent during the first four months of the year, helping to meet national demand.
Jet fuel prices have been highly volatile since the closure of Hormuz, rising to a high of $215.32 a barrel at the end of March before falling to just over $130 a barrel. As jet fuel contributes around 20 to 25 per cent of an airline’s operating costs, keeping ticket prices down has been difficult. Some airlines have already been forced to cut flights.
The low-cost Irish airline Ryanair said that 20 per cent of its unhedged fuel was hit hard by price spikes, leading operating costs to increase by 11 per cent. The firm’s jet fuel for 2027 is currently 80 per cent hedged, at $67 per barrel, and 15 per cent hedged for 2028, at $85 per barrel. Ryanair’s CEO Michael O’Leary said the company’s conservative hedging tactics have helped keep it resilient to rising jet fuel prices.
Meanwhile, in the United States, Southwest is finding innovative ways to secure its supplies, having shipped jet fuel from Texas to California in the spring. The firm’s Chief Financial Officer, Tom Doxey, explained, “It brought like a week’s supply to the West Coast at a time when supply was most constricted … when it was most at risk.” The ship travelled from Houston to Los Angeles via the Panama Canal, transporting 12.6 million gallons of fuel.
California continues to be highly dependent on fuel imports, compared to other parts of the country, meaning that it has been more severely affected by the global shortages. Southwest announced in July that its fuel expenses were almost $900 million higher in the second quarter compared to the same period last year.
Several U.S. airlines have moved away from jet fuel price hedging in recent years due to the abundant supply of fuel, as U.S. refining activities have expanded. This means several companies are feeling the effects of extreme price volatility in recent months. In mid-July, United Airlines announced it expects nearly $6 billion in additional fuel expense for the full year 2026 compared to the expectation at the beginning of the year.
Airlines are staying afloat by turning to alternative jet fuel suppliers as global supplies remain constrained. This has driven up jet fuel prices in recent months. While this technique has worked so far, it is uncertain how long companies can keep it up. Meanwhile, countries with less refining capacity are expected to be disproportionately affected.
By Felicity Bradstock for Oilprice.com
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