Last month we looked at conventional jet fuel and considered why this grade of fuel was so susceptible to price volatility. At the end of the report, we posed the intriguing question as to whether Sustainable Aviation Fuel (SAF) might actually solve this problem – an issue that has very much come back to the fore, with the renewal of hostilities between Iran and the USA.
SAF is basically jet fuel that is not made from crude oil. Governments around the world have mandated its use in their attempts to decarbonise, but its introduction has not been without its critics. Many point out that aviation accounts for less than 3% of worldwide emissions and as such, is hardly the biggest problem when it comes to climate change. Others have questioned the feedstocks used to make SAF and the potential impact on the food-chain. Nonetheless, there is no doubt that SAF is here to stay and most major airlines have made commitments to use the grade in increasing volumes going forward.
In theory, the current crisis in the Middle East offers SAF a golden opportunity. Here we have a domestically sourced and regionally produced fuel, that can displace a fossil fuel (jet) and most importantly at the current juncture, has no reliance on Middle Eastern supply. Furthermore, when it comes to production costs, whilst the price of jet fuel doubled in the second quarter of the year, the price of the main SAF feedstocks (Fats, Oils and Greases = FOG’s) barely moved. Surely this would make finished grade SAF cheaper than conventional Jet Fuel?
So goes the theory, but this is not what has happened. The commercial reality is that finished grade SAF is priced against Gasoil Futures and / or Crude Oil Swaps. Therefore, if the price of oil goes up, so does SAF. Airlines are forced to buy the product at higher prices, because their contracts are based on conventional grades of fuel. In short, even though the SAF supply-chain is wholly different to the oil supply-chain, the pricing mechanisms are the same. So in the second quarter of this year, the SAF price simply followed the chaos on jet fuel markets. When Jet Fuel increased to $1,850 per tonne ($234 / bbl), SAF had also moved to around $2,630 / t (~$334 / bbl).
Why is this the case? Well, the simple answer is that not enough SAF is being sold. For increasingly hopeful 2050 Net-Zero targets to be hit, approximately 500bn litres of SAF will need to be sold per annum. The current annual run-rate is circa 500m litres! Because of limited demand, there is no usable SAF market benchmark – something that all traded liquid fuels require, to ensure buying contracts are not open to market manipulation. In the absence of a benchmark, SAF is simply thrown in with Brent, Jet A1 or Gasoil. The exact same thing happened with Liquified Natural Gas (LNG) 20 years ago. In its early days, LNG was Brent-indexed because there was insufficient LNG volumes to create a benchmark. So traders went for the next best thing which was Brent. This LNG-Brent relationship only ended in the 2020’s, when the massive increase in US exports helped create a defacto LNG benchmark. If SAF is to make the same price evolution, then volume growth has to be very consistent and significant for many years to come.
Accepting the huge challenge of effectively creating a new market, governments have adopted different methods to try and grow SAF volumes. The USA introduced taxpayer subsidies via Joe Biden’s Inflation Reduction Act (IRA), whilst Europe took a different approach in adopting the polluter-pays principle. This placed the burden of SAF mandates on fuel suppliers and therefore by extension, on airlines and their passengers. Sadly, neither approach has been particularly successful. The American solution fell down because Trump scrapped the IRA tax incentives in 2025 (leaving only state-wide subsidies) and in Europe, targets have been so small (for fear of upsetting customers through higher ticket prices) that very little SAF is being sold. This only leaves the “third way” of getting SAF off the ground (ha-ha), whereby highly scrutinised or “brand-conscious” companies engage in partnerships with airlines to increase production. The most recent example of this was in June, when Google and American Airlines announced a three-year agreement to purchase SAF certificates to the value of 65m litres per annum. Google will not actually buy the fuel directly, but the litres will be purchased by American Airlines from Valero at Chicago’s O’Hare Airport. The State of Illinois will issue the certificates via a fuel tax credit.
As impressive as this latest deal is (and whilst complicated, it is fundamentally workable), it is still only one deal. Many more such arrangements will be required, alongside further aggressive volume mandates, if a material and benchmarkable SAF market is to be created. Until that point, the compelling strategic argument for SAF (providing energy supply diversification independent of fossil fuels) and any possible commercial advantage will be lost – because the finished grade will remain anchored to oil market pricing.
