McCarthy: The New Reality
September 28, 2007 By Drew McCarthy
I really hope I’m wrong, but I’m guessing that by the time this
magazine reaches you, the price of oil will have hit US$70 a barrel.
The magnitude of recent price increases has been staggering – oil
prices are up a whopping 55 percent over the past year. In Canada, the
civil aviation industry spends in excess of $2 billion a year on
aircraft fuel and oil. If we continue to see these huge percentage
increases, someone, somewhere out there, will need to come up with at
least an extra $1 billion next year.
now, most people have stopped asking when oil prices will fall. Most
experts are telling us that this is not a “spike,” this is the “new
normal.” The most we can now hope for are more gradual increases.
past summer saw the much-heralded release of the book, Twilight in the
Desert: The Coming Oil Shock and the World Economy, by Matthew Simmons.
Simmons is a Houston-based investment banker specializing in the energy
sector. In the book, Simmons suggests that our optimistic confidence
about Saudi Arabia’s capacity to increase oil production up to 2025 and
beyond is based on inadequate data and auditing reports. According to
Simmons, estimates of global oil production capacity are based on a
series of guesses. The first thing that needs to be done, he says, is
to gather accurate data. Only then can we start to make realistic
predictions and strategies for the future.
The book has caused a
lot of commotion and has undoubtedly contributed to some of the
uncertainty that surrounds the energy markets these days. It has left
many people feeling uneasy about even short-term oil availability.
Increased demand, especially from India, China and other developing
countries, a looming showdown between Iran and the West over Iran’s
renewed nuclear program, and growing activity in speculative trading
and hedge funds are likewise part of the mix.
only short-term response is to raise prices. In mid-August, both Air
Canada and WestJet increased fares to reflect rising fuel costs. FBOs
across the country are expressing concerns over the high prices they
are being forced to charge their customers – and customers, of course,
are forced to pass those costs along wherever they can. Anyone who is
locked into even a short-term service contract is suffering.
a positive note, the ability to move people and goods through the air
is still the most attractive mode of transportation and in some cases,
the only way possible. Speed, convenience, comfort and overall
effectiveness are core 21st-century values that the aviation industry
can deliver in spades. It’s the industry’s competitive advantage.
efficiency is also expected to improve over time as a result of more
fuel-efficient aircraft being introduced into carriers’ fleets.
for all the uncertainty? It will continue to have a negative impact on
fuel prices. This uncertainty has become the new reality.