MICHAEL O’Leary, the colourful CEO of Ryanair Holdings plc, had a message last month for airline rivals that had forgone fuel-cost hedges: “A crazy place to be”.

Crazy is a good way to both describe the decision to do without price insurance — and the jet-fuel market itself.

As with almost every other corner of the economy, the post-Covid-19 recovery seems to have surprised the aviation industry.

Airports are again packed. The number of flights is climbing very quickly and, with it, jet fuel demand. One example: EasyJet plc, a European low-cost carrier, on Tuesday said that booking volumes for this summer are currently ahead of those at the same point in 2019, before the pandemic started.

For most of the past two years, with planes grounded around the world, jet fuel has been the most unwanted product an oil refinery could make.

But as the Western world rediscovers air travel, it’s rapidly becoming one of the most prized commodities.

The turnaround has been remarkable. At the start of the viral outbreak in April 2020, a gallon of jet fuel sold for just 27 cents in the physical market of New York harbour.

Fast forward two years, and prices have become unhinged. Last week, jet fuel briefly changed hands in New York for the outrageous price of US$7.61 a gallon — equivalent to more than US$320 per barrel.

The New York price spike reflects local idiosyncrasies. Only a few miles away in New Jersey, prices were much lower, for example.

But it’s still an indicator of the tightness in the North American and European jet-fuel markets as millions head into airports this week for the Easter break.

The price surge is adding to global transportation inflation, and potentially creating more headaches for supply chains that rely on air freight to move goods. With inventories at razor-thin levels in the US, for some companies, the key may be securing supplies, rather than the price they have to pay.

In some ways, the current jet-fuel market is a copy-and-paste version of what happened to gasoline in 2021. Last year, motorists returning to the roads in droves lifted gasoline consumption, pushing wholesale prices up by roughly 70% from January through August.

This year, air travellers are returning. The International Energy Agency forecasts that global jet-fuel demand will jump in 2022 by 15.9%, the biggest year-on-year increase among all fuels, although still leaving it below 2019 levels.

The surge in consumption has reduced US jet-fuel stockpiles to the lowest for this time of the year since 2005, according to government data.

The situation is worse on the east coast, home to key airport hubs such as Hartsfield-Jackson Atlanta International and Charlotte Douglas International, where stocks have plunged to a 25-year seasonal low.

While China’s renewed lockdown is acting as a brake for now, jet-fuel supply is likely to remain tight for months to come.

“Airlines are adding lots of capacity, and some airlines are already outperforming their pre-pandemic levels,” Eamonn Brennan, DG of airspace manager Eurocontrol, said last week. “People are showing that they are really keen to fly.”

US airports are now at their busiest since the pandemic started. On average, about 2.1 million people per day went through airport security controls during the past 30 days, according to official data, down 11% from pre-Covid levels.

A year ago, the passenger count stood at just under 1.4 million, down 41% from pre-lockdown flows.

In Europe, Heathrow Airport in London also shows a surge in activity. In March, about 4.2 million travelled through its terminals, the most since the pandemic started and double the average during the July-to-September summer holiday period last year.

But demand alone doesn’t explain the tightness. Supply is a problem, too. Jet propellant belongs to a wider pool of fuels called middle distillates, which also include diesel and heating oil.

Diesel demand is rocketing just as Europe and the US shun Russian supplies, so European and American refiners are focused on making as much diesel as they can, at the expense of jet fuel.

For much of the pandemic, that wasn’t a problem as aviation demand was in the doldrums. In fact, refiners solved part of the diesel shortage by diverting molecules that otherwise would have ended up powering aeroplanes into the diesel pool.

But with air passenger numbers rapidly climbing and airlines adding capacity, that’s now an issue.

In the US, 8.6% of refinery output was dedicated to aviation fuel in the last four weeks, well below the pre-Covid yield of 10.2%. In contrast, they maximised diesel, with refinery production of 30.7% over the last four weeks compared to a pre-pandemic average of 29.7%. Price signals could start to convince refiners to shift back toward jet fuel.

But that’s going to reduce diesel supply at the worst possible time. It’s the oil refinery version of whack-a-mole.

Central bankers had hoped that supply-chain problems would soon fade away. The troubles in the jet-fuel market show that as more and more sectors of the economy return to something closer to their normal, further inflationary pressures will emerge. — Bloomberg

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.