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Even Oil Is K-Shaped Now — The Rise Of Max Jet Mode

Every spring, as temperatures rise, oil refineries across the world re-tune their systems to maximize gasoline production. There are two reasons for this. First, warm weather means more people driving. And second, producers have to start stocking up on the Summer gasoline blend which is more environmentally friendly. But this year something different happened. Instead of ramping up gasoline, refiners are actively suppressing it in favour of jet fuel in what some are calling “max jet mode”.

At most refineries this change is small. When a barrel of oil is refined, about 45% goes to gasoline and 10% goes to jet fuel. These numbers are mostly fixed, but producers are now squeezing every ounce of jet fuel out of the oil, upping the jet fuel they get out by a percentage point or two.

But more interestingly, some facilities that previously did not produce jet fuel at all or in very limited portions are now producing much more of it. This article discusses Suncor. They had previously upgraded their facility to produce jet fuel for the domestic market. But due to the Iran war, they are now sending jet fuel to Europe. I suspect we will see more facilities prioritizing jet fuel in the future.

You know, there is a famous phrase in economics that goes ‘the cure for high prices is high prices’. That is, if you increase prices, it will create demand destruction and incentivize more players to enter the market, eventually bringing prices back down.

I’m not a huge fan of this phrase because it’s a bit of an oversimplification. It will take years for us to see the demand destruction and increase in production required to bring prices down. And even then, there is no guarantee that prices will come down. But for jet fuel, it looks like this phenomenon is working, albeit slowly.

Higher prices are encouraging oil refiners to make more jet fuel and that is softening the jet fuel crisis. Now, flights still have to be cancelled, but surprisingly only about 2%. And these flights are primarily short-haul flights.

And there is still an extreme amount of demand for these flights. The CEO of Delta recently sat down for an interview with CNBC where he said:

Our consumer’s really healthy. We live at the top end of that ‘K’ that people talk about, the premium end of the ‘K’

So good news if you can afford flying: flights are still operating mostly normally.

But what if you can’t afford to fly? Well, things don’t look very good for you. According to a study:

Two thirds of Canadian drivers (66 per cent) say high gas prices will prompt them to cancel or limit road trips this summer.

Two thirds. That’s a lot compared to flying which hasn’t really seen a demand reduction at all.

And in some ways it’s even worse because of electric vehicles (EVs). EVs tend to be more expensive, in the US they cost about 20% more up front. So they are mostly purchased by the upper rung of the K. Normally EVs would pay for themselves in about 5–7 years. But now? If high gas prices continue (which they probably will for at least 6 months regardless of whether Hormuz opens) that payback time can almost half. The rich are getting a massive tax break.

Geez, if only there were some sort of subsidy for EVs. Like the one just killed in the One Big Beautiful Bill.

And to make matters worse, these rich people are the least price sensitive which means demand destruction is happening much faster than usual resulting in even higher prices. And it will continue to slow down as EV sales are going up due to the Iran crisis.

Now EV prices are going down, but mostly in China. In the US they are going down much more slowly. There are many reasons for this. Tariffs are one. As is not owning the battery supply chain like BYD. And software is proving to be a problem. Toyota recently built an entire game engine to get around this problem.

Another reason is cultural. US car manufacturers tend to make really big trucks because the cost to make a big truck isn’t really that different from a small car. And there are certain regulatory reasons to do so. But if you want to make a big EV, you now need a big battery and that’s expensive. So EVs in the US have been a massive disaster.

Although in the US EV prices are going down quite fast on the used market. This is because rental companies over-purchased EVs in 2023 and are aggressively selling them off.

There are a few reasons for this. Collision repairs are more expensive and people aren’t familiar with them so they crash more, charging takes longer which means they sit idle for longer, they depreciate faster, and people just don’t like them.

It might be a good time to start looking into a cheap used EV. Because it looks like this situation could continue to get worse. Currently governments are tapping their petroleum reserves, but once that ends we could see oil prices increase even more. And there’s no incentive to fix these things because even if Hormuz opened, everyone knows it’s just a matter of time until EVs replace gas vehicles.

This is creating a very obvious divergence in the economy and people are dealing with it in different ways. So maybe the phrase ‘the cure for high prices is high prices’ isn’t entirely wrong. But it means different things for different people. For the bottom rung of the K it means ‘demand destruction’. And on the top rung it means ‘allocate more resources to the top’.