Rising fuel costs may hurt airlines

The airline industry is one of the segments of the economy that is most vulnerable to steadily climbing oil prices. Fuel is a large part of the cost of running an airline and when fuel prices increase it cuts into an already thin profit margin. When fuel prices spiked in 2008, CBS News reported that for every $1 per gallon that the price of jet fuel increased, it cost each airline an extra $60 million per year.

Airlines coped with higher fuel costs in several ways. To passengers, the most obvious methods were fuel surcharges on tickets and adding fees for baggage. The companies also grounded older, less fuel-efficient airplanes, changed schedules to drop less profitable routes, and furloughed (laid off) employees as the demand for air travel decreased. Four years later, fuel costs are once again approaching 2008 levels.

Although the airlines were starting to finally recover following the 2008 oil shock and subsequent recession, it is likely that the current increase in oil prices will blunt the airline recovery. As oil prices increase, so will the price of tickets. Basic economic theory teaches that as prices increase, demand will decrease and the airlines will sell fewer tickets.

The price of tickets is not the only problem however. Rising oil prices also mean that other goods and services will cost more as well. If people are paying more to fill their car with gas, as well as more for food, energy, and practically everything else then they will obviously have less money to spend on airline travel. The same logic applies to business travel as well. If the business is paying more for other budget items, there will be less money to send employees on business trips. In many cases, new technology such as online meetings and teleconferencing can take the place of face-to-face meetings.

A Raymond James analyst told FlightGlobal .com that 2012 could be a good year for the airlines if they focus on profitability at the expense of market share. In essence, carriers would keep capacity low and focus on profitable routes while maintaining maximum efficiency. This means slow or no growth for most companies with hiring mainly to replace attrition.

How bad the situation will be for the airlines is directly related to how high the price of oil goes. If the price of oil stays below or near its 2008 high, then the effect on the airlines will be minimal since bankruptcies and cost cutting have already made them much more efficient that they were previously.

However, as the Atlanta Conservative Examiner notes, if the Iranian nuclear crisis results in a military strike or war then the price of oil could double or more. This would be catastrophic both for the airlines as well as the economy at large. In that case, the outlook for both airline profits and hiring would be extremely poor.

This article originally published on Examiner.com:

http://www.examiner.com/aviation-in-national/rising-fuel-costs-may-hurt-airlines

Why gas prices are increasing

Drivers in Atlanta and around the country are noticing rising gas prices.  According to historical data from Atlantagasprices.com, the Atlanta average gas price is now $3.588, even higher than the national average of $3.543.  Atlanta area gas prices have risen over 13 cents per gallon in the past month and almost 50 cents per gallon in the past year.  A year ago, Atlanta gas prices were almost 10 cents below the national average.  Economists predict that $4 gas will be a reality this summer and could rise even higher.

In the past half century, oil prices have historically fallen during recessions and then climbed again as the economy improved. This pattern was seen in 2008 as gas prices fell from record highs in the summer to sharp lows after the onset of the economic crisis in August.  According to this historical view, gas prices could be expected to rise as the economy recovers.

The problem with this theory is that, as Dick Morris recently pointed out, the current economic recovery is an illusion.  Changes in the way financial metrics are calculated and cherry-picked statistics mean that while a recovery appears to be underway statistically, the reality is that most Americans are not experiencing it.  As Morris notes, the stock market may be up, but the volume of trading is down because most ordinary Americans are no longer in the market.  The housing markets are still not recovering four years after the real estate bubble burst in 2008.  Housing starts are still at 20 year lows according to the National Association of Home Builders.  Foreclosure rates are up while the average sale price of homes is down according to RealtyTrac.  Georgia remains one of the highest foreclosure states.

Unemployment rates may be down marginally, but it isn’t because more Americans are working.  The Bureau of Labor Statistics changed the population estimates used in determining the unemployment rate in January 2012 just before the rate took a downward plunge.  The BLS notes that “these annual population adjustments affect the comparability of household data series over time” because previous data was not corrected.  Unlike the unemployment rate, the civilian labor force participation rate has not shown signs of recovery.  Similarly, Gallup’s employment survey remains flat.

Even though the U.S. economy isn’t in recovery, other countries are doing better.  Growing economies such as that of China are demanding more oil, which causes the price to increase around the world.

In the absence of a recovery, there are other reasons for the increase in gas prices.  One obvious factor is inflation.  According to a January 2012 report from the Bureau of Labor Statistics, the core inflation rate was only 2.3 percent in 2011.  This rate does not include food and energy, however.  Energy costs have risen by 6.1 percent over the past year, while food costs are up by 4.4 percent. 

One reason for the inflationary costs is the Federal Reserve’s policy of quantitative easing.  The Fed has tried to stimulate the economy by injecting more dollars into the economy.  A basic principle of economics is that when supply increases, price decreases.  In the case of quantitative easing, this means that as the Fed orders more dollars into the system, the value of each individual dollar decreases.  Each dollar buys less as a result.  This means that interest rates stay low, which helps borrowers.  A problem, however, is that imported goods, like barrels of oil, cost more dollars because each dollar is worth less.

Another factor in the rising oil and gas prices is the unrest in the Middle East.  Oil prices often rise and fall with tensions in oil producing regions.  The Iranian nuclear crisis is bringing the region to the brink of war with the possibility of an Israeli strike on Iranian nuclear facilities.  Secretary of Defense Leon Panetta told GasBuddy.com that if Israel attacks Iran oil prices, currently at about $100 per barrel, could go anywhere “between $200 and pick-a-number.”  There is also a civil war raging in Syria and unrest in Egypt in the aftermath of the Arab Spring revolt there.  There is also uncertainty over the future of Afghanistan and Iraq, another major oil producer, as U.S. military operations in those countries end. 

Other factors are at play as well.  The Obama Administration’s decision to cancel the Keystone pipeline means that American refineries are denied a source of cheap oil from Canada.  Similarly, Obama has made it difficult and expensive to drill for oil domestically and off U.S. shores, which means that the supply of oil is artificially limited, keeping prices high.  Ironically, the oil from Canada that would have gone to U.S. refineries is likely to go to China after President Obama’s decision.

Other factors, such as weather and refinery closures can also affect the supply of oil and therefore the price.  These factors are reported and analyzed weekly by the Energy Information Administration on its petroleum page.  For example, there have been several Caribbean refineries that previously sent gasoline to the U.S. east coast have closed recently according to the February 23 report.

In the end, there are only two ways to reduce the price of oil and gasoline.  Either the supply must be increased or demand must be reduced.  The Obama Administration is taking only token steps to expand oil exploration and drilling, while demand continues to increase around the world.  Demand will likely continue to rise unless the upward pressure of oil prices or some other factor causes the world to slide back into recession.

This article originally published on Examiner.com:


http://www.examiner.com/conservative-in-atlanta/why-gas-prices-are-going-up-1

Coping With Record High Fuel Prices

Record fuel prices have Americans, as well as drivers around the world, feeling gas pains at the pump. High oil prices also drive up the cost of many other items due to production and delivery costs. High gas prices are certain to be a major issue in this year's elections.

Currently, the high price of oil reflects increasing demand around the world, particularly from developing countries such as India and China, as well as constraints on supply. Supply is limited by the high cost of exploration for new oil fields and bureaucratic limitations on opening new refineries.

While the high cost of gasoline is a problem for many, there are a few groups who benefit from high price of oil. Oil producing countries reap huge profits from expensive oil. Environmental groups seeking to reduce oil consumption have sought to artificially drive the price of oil even higher by increasing gas taxes. Alternative energy companies are an attractive investment when the price of oil is high.

For groups who seek to keep the price of oil high, there are several courses of action. First, they should work to keep demand high by discouraging conservation. Drivers should be encouraged to not to carpool or combine trips. Drivers should also be told not to slow down. Driving over 60 mph dramatically increases fuel consumption, especially in gas guzzling SUVs. The effective cost of gasoline increases by about twenty cents per gallon for each five miles per hour over 60 mph. For example, driving 70 mph means that you may as well pay an extra forty cents per gallon to fill up your tank. Not maintaining cars and keeping tires properly inflated also increases fuel consumption.

Keeping demand high is also accomplished by preventing the adoption of practical alternate sources of energy. Many sources of energy that are wildly popular hold little promise for a market the size of the United States.

Brazil has become almost totally energy independent through the use of ethanol-based fuels and many would like for the US to emulate their model. The problem is that Brazilian ethanol is sugar-based while only corn-based ethanol is widely available in the US. Corn ethanol is not as efficient as sugar ethanol. It actually takes more energy to produce and distribute corn ethanol than the ethanol itself provides. Additionally, it would take an area roughly the size of New England to provide enough ethanol to meet American needs. Finally, diverting corn to ethanol drives up food prices, which means that consumers would simply trade expensive gas for expensive food.

Solar and wind power are trendy sources alternate energy, but neither is ready to supplant oil as the primary engine of the world economy. Both require large capital investments in infrastructure and both are subject to changing weather. In the future, better means of storing large quantities of electricity and cheaper solar collectors and windmills may make solar and wind power more attractive, but presently they are not cost-effective or practical.

To keep gas prices high, consumers should also make certain that the supply of oil does not increase. The most effective way of doing this is by continuing to elect politicians who make it difficult to explore and drill for oil domestically in the United States. Current US policies prevent drilling in much of Alaska, the Gulf of Mexico, and federal lands in the continental US. These areas hold 635 trillion cubic feet of natural gas, enough to supply 60 million homes for 100 years, and 112 billion barrels of oil, enough to supply US needs for about 60 years.

Additionally, Congress and state governments are jointly responsible for high taxes on gasoline. Taxes on gasoline make up about 15% of the cost of a gallon, while oil company profits only account for about 4%. A reduction in gasoline taxes would provide relief at the gas pump for American drivers, and some presidential candidates are calling for a gas tax moratorium. Others are calling for increases in the gas tax, however, arguing that higher prices will decrease demand and spur conservation.

Government red tape also contributes to the high cost of gas. Environmental regulations make it a difficult and expensive proposition to build refineries to convert oil into gasoline. The last US refinery was built in the 1970s, although a few new refineries are under construction.

Environmental regulations also require that refineries manufacture expensive blends of gasoline in certain areas and in the summer to decrease pollution. Changing formulas is expensive and requires the refinery to stop production to make the changes. Making fewer types of gasoline would lower the cost and allow more gasoline to be produced.

Government regulations also slow the construction of nuclear power plants, the most practical form of alternate energy currently available. Advances in nuclear plant design allow nuclear power to be safe, clean and cheap. France currently supplies about 80% of its energy needs through nuclear power. Environmental groups and government regulations make it difficult to build nuclear plants in the US, however.

In short, there are two ways to lower the price of gasoline: by either increasing supply or decreasing demand. As long as people around the world continue to use large quantities of oil and limiting oil exploration and drilling, oil prices will continue to stay high.

How NOT to Lower the Price of Gas

Record fuel prices have Americans, as well as drivers around the world, feeling gas pains at the pump. High oil prices also drive up the cost of many other items due to production and delivery costs. High gas prices are certain to be a major issue in this year’s elections.

Currently, the high price of oil reflects increasing demand around the world, particularly from developing countries such as India and China, as well as constraints on supply. Supply is limited by the high cost of exploration for new oil fields and bureaucratic limitations on opening new refineries.

While the high cost of gasoline is a problem for many, there are a few groups who benefit from high price of oil. Oil producing countries reap huge profits from expensive oil. Environmental groups seeking to reduce oil consumption have sought to artificially drive the price of oil even higher by increasing gas taxes. Alternative energy companies are an attractive investment when the price of oil is high.

For groups who seek to keep the price of oil high, there are several courses of action. First, they should work to keep demand high by discouraging conservation. Drivers should be encouraged to not to carpool or combine trips. Drivers should also be told not to slow down. Driving over 60 mph dramatically increases fuel consumption, especially in gas guzzling SUVs. The effective cost of gasoline increases by about twenty cents per gallon for each five miles per hour over 60 mph. For example, driving 70 mph means that you may as well pay an extra forty cents per gallon to fill up your tank. Not maintaining cars and keeping tires properly inflated also increases fuel consumption.

Keeping demand high is also accomplished by preventing the adoption of practical alternate sources of energy. Many sources of energy that are wildly popular hold little promise for a market the size of the United States.

Brazil has become almost totally energy independent through the use of ethanol-based fuels and many would like for the US to emulate their model. The problem is that Brazilian ethanol is sugar-based while only corn-based ethanol is widely available in the US. Corn ethanol is not as efficient as sugar ethanol. It actually takes more energy to produce and distribute corn ethanol than the ethanol itself provides. Additionally, it would take an area roughly the size of New England to provide enough ethanol to meet American needs. Finally, diverting corn to ethanol drives up food prices, which means that consumers would simply trade expensive gas for expensive food.

Solar and wind power are trendy sources alternate energy, but neither is ready to supplant oil as the primary engine of the world economy. Both require large capital investments in infrastructure and both are subject to changing weather. In the future, better means of storing large quantities of electricity and cheaper solar collectors and windmills may make solar and wind power more attractive, but presently they are not cost-effective or practical.

To keep gas prices high, consumers should also make certain that the supply of oil does not increase. The most effective way of doing this is by continuing to elect politicians who make it difficult to explore and drill for oil domestically in the United States. Current US policies prevent drilling in much of Alaska, the Gulf of Mexico, and federal lands in the continental US. These areas hold 635 trillion cubic feet of natural gas, enough to supply 60 million homes for 100 years, and 112 billion barrels of oil, enough to supply US needs for about 60 years.

Additionally, Congress and state governments are jointly responsible for high taxes on gasoline. Taxes on gasoline make up about 15% of the cost of a gallon, while oil company profits only account for about 4%. A reduction in gasoline taxes would provide relief at the gas pump for American drivers, and some presidential candidates are calling for a gas tax moratorium. Others are calling for increases in the gas tax, however, arguing that higher prices will decrease demand and spur conservation.

Government red tape also contributes to the high cost of gas. Environmental regulations make it a difficult and expensive proposition to build refineries to convert oil into gasoline. The last US refinery was built in the 1970s, although a few new refineries are under construction.

Environmental regulations also require that refineries manufacture expensive blends of gasoline in certain areas and in the summer to decrease pollution. Changing formulas is expensive and requires the refinery to stop production to make the changes. Making fewer types of gasoline would lower the cost and allow more gasoline to be produced.

Government regulations also slow the construction of nuclear power plants, the most practical form of alternate energy currently available. Advances in nuclear plant design allow nuclear power to be safe, clean and cheap. France currently supplies about 80% of its energy needs through nuclear power. Environmental groups and government regulations make it difficult to build nuclear plants in the US, however.

In short, there are two ways to lower the price of gasoline: by either increasing supply or decreasing demand. As long as people around the world continue to use large quantities of oil and limiting oil exploration and drilling, oil prices will continue to stay high.