LIBYA is in the midst of civil war as rebel forces strive to remove Muammar Qaddafi from power. In the meantime, the North African country's oil output has been halved, and fuel prices around the world continue to rise under the threat of further revolt in the Middle East—and especially the protests planned in Saudi Arabia for March 11. A leader from this week's print edition examines the risks of an oil shock:
[T]he biggest danger lies in the Middle East itself, where subsidies of food and fuel are omnipresent and where politicians are increasing them to quell unrest. Fuel importers, such as Egypt, face a vicious, bankrupting, spiral of higher oil prices and ever bigger subsidies. The answer is to ditch such subsidies and aim help at the poorest, but no Arab ruler is likely to propose such reforms right now.At its worst, the danger is circular, with dearer oil and political uncertainty feeding each other. Even if that is avoided, the short-term prospects for the world economy are shakier than many realise. But there could be a silver lining: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon. The 1970s oil shocks transformed the world economy. Perhaps a 2011 oil shock will do the same—at less cost.
We can hope that an oil shock would transform economies. But in the meantime, a lot of people are going to be affected. Rising oil prices are already changing business travel as fuel price pressures force airlines to increase ticket prices. Even when oil is relatively cheap, jet fuel costs represent some 30 percent of airline overhead. As prices rise, that percentage grows, and ticket prices have to go up, too. And really expensive oil causes a vicious cycle that devastates the airline industry. Portfolio's Joe Brancatelli explains:
Hundred-buck-a-barrel oil and the pain it inflicts the carriers' always-precarious bottom lines creates a vicious circle of chaos in business travel. As basic fares rise, leisure travelers fall away and opt for "staycations." That means airlines look to business travelers to carry more of the financial load. But rising fares force business travelers to reassess their plans and cancel trips. That negatively impacts the economy at large, which further depresses demand for airline travel. That requires airlines to slash seat capacity and ground aircraft, which means fewer flights and more inconvenience for business travelers. The added inconvenience of flying leads business travelers to cancel even more trips. Then, in desperation, airlines slash fares to attract leisure travelers and end up flying planeloads of unprofitable flyers.
The International Air Transport Association, the trade group for the big airlines, downgraded its outlook for the year earlier this week based on rising oil prices. And with jet fuel over $3 a gallon, the Washington Post is raising the spectre of 2008, "when oil prices surged to record levels and U.S. airlines lost billions of dollars." IATA isn't quite so pessimistic—it thinks that capacity cuts in the North American market and a still-recovering economy will help offset some of the damage from higher fuel prices. But for business travellers, the news is still bad: ticket prices will almost certainly continue to rise as long as the unrest in the Middle East continues. And if the protests planned for Friday in Saudi Arabia materialize in any meaningful manner—or the grip of the royal family there appears to wobble at all—even the Post's 2008 comparison may soon prove to be a far too rosy vision of airlines' future.