It is often said that the best cure for high oil prices is high oil prices: they reduce demand and rebalance the market. And already some users of oil are pulling in their horns. Airlines including Lufthansa, the US’s Delta, Hong Kong-based Cathay Pacific and Australia’s Qantas have reacted to the doubling of jet fuel prices by cutting flights. The snag is that the peculiar rigidities of oil mean that this will do little to bring prices back down to earth.
When a refiner “cracks” a barrel of crude oil, the result is a barrel’s worth of products spanning from butane to bitumen, with gasoline, jet fuel, diesel, naphtha and fuel oil in between. These emerge in fairly fixed proportions — in other words, a refiner has little ability to prioritise one over the others.
True, by building simpler or more complex refineries and choosing different types of crude oil as feedstock, it is possible to make a little more of one type of product. But once the plants are built, and taking the world’s crude oil in aggregate, the system can only shift the share of what it produces by a smattering of percentage points.