By David L. Brown
The stark headline on the BBC web site read “Oil hits $100 barrel.” For months, even years that moment had been feared and awaited with trepidation, not least by the airline industry with its enormous appetite for fossil fuels and a market that could not survive significant increases in fares. And at last the unthinkable had happened.
And the historic date when that hundred dollar benchmark was passed? January 2, 2008, just a few months ago.
As we entered this epochal New Year, it didn’t seem that it could get any worse than that … and yet today crude oil hit the $135 mark and seems poised to continue to rise.
For a long time I have marveled at the blind chutzpah of the airlines, an industry that continued to expand, investing in new and bigger planes, cycling more and more capital into a business model that absolutely depended on the continuation of cheap and plentiful oil far into the future. A jet aircraft is not a short-term investment, particularly the latest generations of planes such as the Boeing 787 Dreamliner and the massive A380 double-decker from Airbus that are now coming down the supply pipeline. Yes, the newest planes will be somewhat more fuel efficient, but they still suck jet fuel like a Hoover sucks dirt. Here is a pie chart that illustrates the huge operating costs of running an airline:
With Peak Oil looming, how could the managers of those airlines be so certain that there would be a future for their metal birds, that the continuing flood of passengers would grow larger each year, and that they could continue to offer cheap and convenient travel? There is only one possible answer: They did not know, or did not believe, that oil would someday soon be in diminishing supply. They must have accepted the lies and duplicity of OPEC thieves and oil company executives who assured them there was plenty of oil and always would be. They brushed aside the voices of caution that warned that the future must be different, that a world that has run on oil would someday run out of oil.
Now the airlines are like deer in the headlights of an onrushing freight train. An article on the FoxBusiness.com web site today telegraphs its message in the headline: “$135 Oil Means Airline Bankruptcies Inevitable.” Yes, the specter of $100 per barrel oil just a few months ago was bad enough to send shudders down the backs of airline executives … so think how they must feel now? Here’s a sample from the Fox story:
“The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy,” said [American Airlines] Chairman and Chief Executive Gerard Arpey in a statement.
While passengers may complain about being nickeled and dimed by the airlines [for example, by charging $15 for each extra piece of checked luggage], industry executives and experts have said they have no choice. The cost of jet fuel is up 63% from a year ago, according to the Air Transport Association, a trade group.
“The race is on to see if airlines can raise fares high enough to cover the fuel bills before they run out of cash,” [Roger] King [an airline industry analyst] said.
Northwest and Delta executives said last month that fares must increase by as much as 20% this year to break even. That was when oil was $115 a barrel.
I have news for the airlines: They are screwed. The pinch of high fuel costs will strangle them because the more they are forced to raise their fares, the fewer people will choose to fly. As fewer people travel, the airlines will be flying with more empty seats. That will lead to a vicious circle that cycles ever downward. Tourism feeds on low-cost fares and it’s a good guess that people who are already struggling to keep their SUVs fueled are going to think twice about flying away to some exotic locale.
Business travel likewise will dwindle as profits fade and bean counters tighten up the reins on corporate spending. Airlines will be forced to take planes out of service, but the lease payments will continue and there will be no customers for the used fuel-guzzling craft. A kind of economic Armageddon awaits the airlines, an industry that built its edifice on the shifting sands of cheap and abundant oil and Arab lies.
I recently read that some airlines have begun to fly their planes more slowly to reduce fuel use. That just means longer flights for passengers which will lead to more dissatisfaction. The ultimate fuel saving strategy is to just park the planes, and in many instances that is exactly what will happen. I envision thousands of excess planes parked on airports around the world, slowly deteriorating as the logos of their once proud owners fade in the Sun.
Here is more from the Fox report:
All cost-cutting measures airlines could have taken “have now largely been exhausted,” Northwest CEO Doug Steenland said last month during a press conference.
“Current fuel prices pose an earnings challenge to the industry that actually exceeds the economic impact of 9/11 in our view,” JPMorgan’s [Jamie] Baker added.
Another factor hurting the airlines is the ongoing credit crunch. Airlines are raising fees because they have no other way of getting cash right now, experts said. Airlines are trying to build up a storehouse of cash to keep them afloat in hopes that the price of oil will fall.
“Raising capital is finite,” Baker said. “Once opportunities are exhausted, we believe management will have accomplished little other than buying time. It’s time for fuel to recede … or merely time to wait for others to die and greatly reduce capacity in the process.”
The high cost of flying the big birds all over the globe will also impact food prices and availability, impacting practices such as flying fresh strawberries to market from wherever they are in season. Food prices are already under pressure because of shortages and high energy costs, and choices will be less varied as the cost of moving food around remain high.
You can still find people who say that the Oil Peak is a myth, but it is becoming increasingly difficult for them to say it with a straight face. They end up looking like Baghdad Bob who assured TV listeners that the Americans were being fought to a standstill while behind him Abrams tanks could be seen entering the central square of the Iraqi capital.
Among the biggest liars, of course, are our very special friends the Saudis, who continue to insist that they have plenty of oil, just oceans of it. And yet last week when the American president visited Riyadh and pleaded with them to increase output, they dissembled and backpedaled, saying that they didn’t see a need for any increases. The fact is, they cannot boost output because their wells are running dry. The immense Ghawar field that has pumped out billions of barrels is sputtering along with the other Saudi fields, and the Saudis are failing to make any new discoveries. Unfortunately for the world, Arabs seem to be quite talented natural liars.
In the trade paperback edition of his book “Twilight in the Desert” (2005), oil industry analyst Matthew Simmons wrote about the impending decline of the Saudi oil fields. Discussing the Saudis’ prevarication about actual reserves, he stated:
“Until we get a vastly improved level of field-by-field production data, the world will be subjected to an increasingly strident debate about whether Saudi Arabia’s oil production, and thus the world’s oil supply, is peaking. Until we have clear proof the peak has occurred, we will be tempted to entertain the notion that the world will be spared this event through new technology breakthroughs — by then it might just be too late to formulate solutions and strategies to prevent economic chaos as we face an irreversible decline in oil supplies.”
Simmons nailed it. Now, just three years later, the present world oil supply is being maintained at near its peak only through heroic effort and on a raft of lies. It is ever so clear that Peak Oil has been reached, and because overstating reserves has been a common practice by producing nations and oil companies alike, the world is being caught in exactly the situation against which Simmons warned.
The lies about oil have led us into danger like the children of Hamelin who followed the pied piper’s song to their doom. And it is not least the airlines, those fragile things that depend so much on cheap oil to run their expensive silver birds, that will suffer the fate of sudden economic change. With the end of abundant oil, the age of cheap air travel is coming to a sudden and abrupt end, full stop, finito.
As I have noted so much of late, the world is in the process of a quite significant sea change. Already, with gas prices soaring past the four dollar mark, it is becoming a little hard to recognize. I don’t think it’s too much to say, “You ain’t seen nothin’ yet!” Stay tuned.