As two major airlines report large losses in the 2nd quarter, a study by Fitch Ratings just released sees the potential for major bankruptcies after Labor Day. I have written about bankruptcies earlier this year, which have been for smaller firms like Aloha and Skybus. But Fitch predicts that a persistence or increase in current oil prices would cause some of the majors to fail and induce further jumps in airline ticket prices.
These oil prices are hurting people all over the US everyone as we witness some of the fastest inflation in a generation on energy and food prices. Some good news came in the EIA weekly oil report on US supplies. Crude oil, gasoline, distillates, and propane all increased significantly. Overall, inventories remain historically low, but this report may help to contain oil prices through next week barring a big supply disruption or dramatic fall in the dollar. The main reason for the good results was a 350,000 (3.8%) drop in gasoline demand from this week last year as drivers go for efficiency and jump on mass transit. Amtrak reported even more ridership growth as June had 12% more passengers than last year. Many are wondering if 2007 was the peak in US gasoline consumption, and I certainly hope so — it would help the climate and our wallets.
The last bit I would like to mention is the serious oil crisis in the developing world. While we in the US don’t have the splendor of exporter oil riches these days like Saudi Arabia, the UAE, Kuwait and Russia — we don’t face the fuel shortages of many in Pakistan, Zambia and other poor non-producing countries. Our pain at the pump, which lowers our ability to watch every summer blockbuster in theaters, pales in comparison to what many countries face who are having to cut back on basic services. For instance, the Marshall Islands is reeling from its increased fuel bill for electricity production, and may face blackouts in coming months unless it is able to borrow significantly. Pakistan is borrowing from Saudi Arabia to keep its blackouts from getting even worse. Our lower oil consumption may move us over the course of a year from consuming ~25 barrels per person to ~24 barrels (down ~4%) by trading in our SUV for an efficient sedan. But most people around the world see lowered demand starting from ~5 barrels per person through blackouts that prevent fans from cooling them on hot summer nights or machines at hospitals may cut off when patients need them most. The more we can accelerate efficiency in appliances and development of renewable sources, the better we will be equipped to fight global poverty and empower all economies to thrive.
Regarding your last point, McKinsey has a new report on efficiency – generally pretty straightforward in its recommendations of solutions, but has some interesting breakdowns of potential and costs for improving energy efficiency:
http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/How_the_world_should_invest_in_energy_efficiency_2165
Also note in the footnotes that “All internal rate of return (IRR) calculations assume that oil costs $50 a barrel—far less than today’s prices, which would generate higher returns.”
(When will McKinsey start using current oil costs in their evaluations?)
Danny,
Thanks for sharing that McKinsey piece. While I will need to look over it more, I appreciate your point that they base their numbers on $50 oil. I have written a piece about the disservice of forecasters who have constantly believed oil prices will fall to $50 or below and hope to get in to some newspaper in Op-Ed form soon — I think that is a huge point and a shortcoming. McKinsey, if your report is based on $50 oil, than it seems like bogus material to me, or at least unfinished. Maybe they should publish via scenarios — $50 oil scenario and $200 oil scenario. This is one of the main things that I think climate modellers and policymakers are missing too — if we take into account sustained high prices for fossil fuels (current oil prices are like a ~$150/ton tax on carbon dioxide from oil since Stern, Nordhaus, and others have $50 oil as their general assumption). A $200 oil scenario may mean that efficiency can profitably flatten global energy demand going forward — rather than just cut it in half. We’ll see if we can get high prices included more in such models to help decisionmakers in government and business to make better decisions for their wallets and our climate.