Marketing Review — Summer 2008 - (Page 35) leaves Iraq could drastically reduce the region’s oil output. This is unlikely, but the probable impact of such a conflict is so great that the possibility cannot be ignored. The spread of fundamentalist Muslim regimes with a grudge against the West also could keep OPEC oil out of the American market. If the United States loses access to Middle Eastern oil, it will buy even more from Canada and Venezuela, tap the Arctic National Wildlife Reserve, and develop the deepwater fields under the Gulf of Mexico much faster than expected. In a prolonged energy emergency, America also would be likely to develop its vast reserves of oil shale, which have long been economically viable at crude prices over $40 per barrel. New technology reportedly makes it profitable at any price over $17 per barrel. With enough shale oil to supply its own needs for 300 years, the United States could become one of the world’s largest petroleum exporters. Developing shale would devastate the environment, but with crude oil prices in triple digits during a Mid-East war, the environment would be considered expendable. IMPLICATIONS FOR HOSPITALITY AND TRAVEL: There is at least some hope that oil prices will stabilize at livable levels within the next few years. 32) When not perturbed by greater-than-normal political or economic instability, oil prices average around $65 per barrel. New energy demand from the fast-growing economies of China and India has raised the floor that until 2004 supported oil in the $25 per barrel range. Nonetheless, the spike in prices to nearly $150 per barrel in mid-2008 was an aberration that cannot last. At least four factors contributed to the bubble in energy prices: Perhaps 30 percent of the increase in oil prices to their June 2008 high stemmed from the long-term decline in the value of the U.S. dollar on foreign exchange markets. Another $10 to $15 per barrel represented a “risk premium” due to fears of instability triggered by the Iraq war and Washington’s threats to attack Iran. Without those two factors, $145 oil would have been $100 oil. A worldwide shortage of refinery capacity has helped to drive up the cost of gasoline, fuel oil, and other energy products. Futures speculation in the energy markets also may have helped to drive up oil prices (though complaints from Washington about price manipulation by evil speculators seem much like turning one’s furnace on high and blaming the heat on the thermometer.) None of these factors is permanent. ASSESSMENT: Given the condition of the American dollar, it might be better to denominate oil prices in euros—though this could be even more devastating for the American economy in the event of future episodes of instability. Aside from that, the long-term trend toward stable energy prices can only strengthen as the West reigns in consumption and alternative energy technologies become practical. IMPLICATIONS: Barring an American invasion of Iran, oil prices of more than $100 per barrel cannot be sustained. New refineries in Saudi Arabia and other countries scheduled to come online by 2010 will ease the tight supply-demand SUMMER 2008 • 55 TRENDS FOR TRAVEL & HOSPITALITY 2 balance for oil, and by then the Iraq war should be winding down. At that point, we can expect to see oil prices retreat gradually to around $65 per barrel. In response to high (by American standards) gas prices, the U.S. government probably will boost domestic oil production and refining to increase the reserve of gasoline and heating oil. This stockpile would be ready for immediate use in case of future price hikes. This will make it easier to negotiate with OPEC. A key step in controlling oil prices, and an indicator of Washington’s seriousness about doing so, would be development by the government of at least four new refineries around the country, probably for lease to commercial producers. To avoid problems with neighbors, the refineries could be located on former military bases, which the government already owns. We rate the odds at no more than 50:50. In the long run, the United States almost certainly will drill for oil in the Arctic National Wildlife Reserve, though efforts will be made to minimize environmental damage. For example, drilling will take place only in the winter, when the tundra is rock hard. This small new supply of oil will have negligible effect on oil prices. By 2020, the new fields under the Gulf of Mexico will come online, putting even more pressure on oil prices. IMPLICATIONS FOR HOSPITALITY AND TRAVEL: Air carriers are facing difficult times as their largest single expense continues to climb. Many have added fuel surcharges to ticket prices, but rising prices eventually make it harder to fill seats. This puts an even greater premium on efficiency and cost-cutting. It also is likely to trigger more cooperation among competing airlines, with many sharing planes when passenger demand cannot fill separate flights. Despite these and other efficiencies, we will not be surprised if fuel expenses alone ground one or two of the weakest carriers before the price of jet fuel stabilizes. For the rest, the worst should be over in another two or three years. Like the airlines, cruise operators are being forced to adopt fuel surcharges to maintain their profit margins. This will not seriously affect luxury cruiselines, but if oil prices remain in triple digits it could begin to erode the family and economy cruise markets. Again, the crunch should pass relatively soon. For the hotel sector, energy costs are an important expense, but far from the largest. So long as the price of oil does not go much higher, it should have only a modest effect on the bottom line. of hotels and other lodging facilities. In the United States, some hotels may find that high gas prices inhibit drive-in traffic, particularly in family-oriented markets dependent on long-distance travel. This should be only a minor problem. In Europe, oil shortages caused by temporary closure of Russian pipelines could cause periodic price spikes that inhibit travel for brief periods. We do not expect such problems to last any longer than it takes Moscow to make its political points. By 2015 or so, Europe will have developed other petroleum sources, making the unreliability of supplies from Russia much less troublesome. While no one likes paying more for gas and electricity, high oil prices should have a relatively modest effect in the restaurant sector, where personnel costs trump all others. The greatest danger is that the price of gasoline will combine with other economic uncertainties to discourage dining out. If so, the 35
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