Thursday, May 8, 2008

What Will Happen to Aviation When Oil Hits $200 a Barrel?

There is an irony to the recent Green Peace Publicity stunt at Heathrow Airport.  The rapidly increasing price of oil is threatening to put the air industry out of business.  The new Heathrow runways which Greenpeace advocates risked their lives to protest may no longer be needed by the time it comes into service.   

No one sees it coming more clearly than the blogger with the nom de plume of Jerome a Paris.  Jerome does not say so directly, but if what Jerome says is true, the hand writing is on the wall for air travel.   Jerome is writing the same story on the European Tribune, Daily Kos, and The Oil Drum,  $200 a barrel oil is coming.    I believe that he is right.   No gas tax holiday is going to stop it, in fact a gas tax holiday is a political stunt that will only hasten the day when $200 a barrel oil is upon us.  The problem is simple.  Chinese oil use is increasing by 5% to 10% a year, Car sales in India are up 17% over last year, and the production of Middle Eastern oil is either about to peak, or has actually peaked already.  The result is a squeeze between the increasing demand for oil, and the stagnant or decreasing oil supply.  

 The consequence of this squeeze is an ever increasing demand for oil until demand can no longer be sustained.   Jerome a Paris's chart at left illustrates how the dramatic rise in the price of oil during this decade.  A Paris argues that it is only a matter of time before oil hits $200 a barrel, and indeed $200 a barrel oil seems inevitable.   

"But," you ask, "how is this going to kill air travel?" 

The answer is simple.  The airlines have to pay for jet fuel, and what they pay is directly tied to the cost of oil.   Now one of two things is going to happen as the price of jet fuel goes up.    Either the airlines raise ticket prices to cover the cost of get fuel, or they subtract the fuel price increase from their bottom line.   Either way the air industry looses.  Air travel will drop as air ticket prices increase.   If an airline does not increase ticket prices to cover the cost of fuel oil, it will eventually loose money, and go bankrupt.   But if air travel drops to much, eventually the airlines' fixed expenses will catch up with them, and the airlines will be forced into bankruptcy.  

Eventually the increasing cost of oil will enforce changes on the way we travel, do business, and one our way of live.  It should be noted that rail transportation is far more energy efficient than air travel.  High speed electrical trains can move passengers from city to city almost as quickly or even more quickly than  jet aircraft can.  Of course a good deal of money would have to go into upgrading the rail system, in order to carry 200 MPH+ trains.   But there would be money to make too as passengers increasingly shifted from air travel, to high speed passenger trains.  

The future of the air industry looks dismal.  Hopes would include bio-fuels which are beginning to encounter increasing environmental, humanitarian and economical objections.     Another hope would involve some form of hydrogen.  Don't bother to think about it.  For multiple reasons, hydrogen is not going to save the airline industry.  

Is air travel then going to be a thing of the past - a phenomena of the 20th century?  It is beginning to look that way.  


DV8 2XL said...

Economic growth, higher disposable incomes and increased leisure time on the demand side, combined with falling real airline tariffs and technical change on the supply side, have been important driving forces behind the long-term growth of international air transport.
Indeed, air traffic has doubled in each of the past three decades, expanding consistently at about twice the rate of global GDP. Airfares, meanwhile, continue to hover around historic lows. The average ticket costs approximately what it did in the early 1980s, despite tremendous spikes in fuel costs. Just for this reason, more people are flying than ever before.

However if you look at how the airlines are delivering this service, it is quickly apparent that there is much more room to reduce fuel consumption in the system as a whole.

Frequency has been a huge selling point for airlines as they have sought to attract travelers by offering a number of departures to the same destination every day. Obviously bigger gauge operating less frequently would be much more fuel efficient. Also the net reduction of traffic would alleviate the wasteful burns that are caused by long waits on the ground in departure lineups and holding patterns on arrivals.

The use of regional jets to service smaller stations will have to stop and be replaced with turboprop equipment. The fact of the matter is that the use of jets on these routes was never justified except as a matter of prestige.

Short-haul markets as you suggest, must return to rail and this must be integrated with long-haul air travel by laying track to the airports, as has been done in many European stations and of course with coordinated scheduling and joint fares.

Lastly, air transport will have to be recognized as integral part of the modern, global economy by the various governments that tax it, not as a cash cow for general revenue.

And these changes will come to pass; as fares rise to meet fuel costs the market will drive these adjustments as it always has in this industry. Reports of its death are premature.

Charles Barton said...

Most of the flights I have been on recently have been completely booked, so decreased frequency is not going to bring down the per passenger fuel consumption that much. What I have noticed is a decline in the quality of airline service, at least as far as American Airlines is concerned. The last flight I took left several hours late. The problems were simple, and suggested that the airline had deep organizational issues that I had never encountered in a flight before.

Recently several small airlines went bankrupt, as several large ones did in the recent past. Airlines are trying to stay afloat by merging. We have clear signs of an industry already in distress. The price of oil went up S10 a barrel in the last week. How many more weeks like that before the price of Oil starts telling on the viability of the air transport system? What is air transport going to be like 10 years down the line? 20? 30? Will there be air transport in 20 years. Where will the fuel come from?

Anonymous said...

Charles, I'm increasingly coming to the same conclusion--that air travel will be a fond dream of the past for the majority of the public, and an expensive indulgence for the rich.

Flying on a regular plane in the future will be like flying on the Concorde was in the 80s--very expensive, not worth it, and a status symbol.

The rest of us schmoes will be getting around the country by rail, or avoiding travel altogether through teleconferencing and telecommuting.

Look at the bright side--with $2000 airplane tickets, they're bound to start including meals and peanuts again!

Anonymous said...

I think it would be a mistake to assume that today's high and rising oil prices are a result entirely of increased demand. The real culprit behind most of the price increase over the past 6 years has been the weak dollar. The first oil crisis in the 70's came when Nixon took the US off the gold standard. Further oil shocks followed throughout the inflationary 1970s. When Reagan and Volcker killed inflation, oil plummeted, even as demand continued to rise. In more recent years, loose monetary policy has weakened the dollar, and led, as such weakening always does, to higher commodity prices across the board. The recent runup since last summer tracks almost perfectly with the Fed's massive easing in response to the real estate and mortgage crises; everyone expects the Fed to maintain easy money to deal with this crisis, so to hedge against the resulting higher inflation, they bid up the price of commodities, often with a healthy dose of borrowed money. When a proper monetary balance is eventually restored, the dollar will strengthen and commodities, including oil, will fall. The high prices also make previously uneconomic oil deposits very economical to tap -- but the oil companies won't tap them yet, because they believe that the price will eventually fall.

If oil ever got to $200 and stayed there, it would easily pencil out to use molten salt reactors for the express purpose of generating cheap heat and electricity to pull CO2 out of the air and refine it into synthetic gasoline, diesel, and jet fuel. One way or another, higher prices will bring out more supply, so that people can keep flying. Those same high prices will make it economical to spend several billion dollars redesigning and changing out airplane engines, which are notoriously inefficient. To the extent that higher prices eventually yield higher supplies I just hope that those supplies are the carbon neutral and sulfur-free synthetic types, and not the dirty terrestrial type.

So cheer up! We can still keep flying; ironically enough, the way to keep flying in an economical and ecologically sustainable way, may be to build a lot of the type of reactor that you talk about on your blog!

Sincerely, david herr

Anonymous said...

I wouldn't be so sure about the end of air travel, Charles.

There's a lot of efficiencies that can still be squeezed out of aircraft design - for instance, the blended wing body design.

Not to mention a switch back to turboprops or to propfans, both of which would result in slower cruising speeds than current aircraft, but are considerably more efficient.


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