The 2008 oil price spike and the airline industry  

Energy Bulletin has a report on oil prices and the airline industry from "Annals of Air and Space Law" by Charles Schlumberger, Principal Air Transport Specialist of the World Bank - The 2008 oil price spike and the airline industry.

In July 2008, the price of crude oil reached an historical high level of US$147 per barrel. However, as a consequence of falling demand over the following six months, the price declined by well over 60%. This article examines the causes behind the oil price spike, which has become a serious commercial threat to many airlines. While speculative forces may have been the primary driver, increased demand by emerging markets, decreasing inventories, as well as tight production played a significant role in this development.

The article subsequently expands its scope, and evaluates two of the possible future challenges in global oil production. The first concerns a peak in production due to inadequate past investments in upstream infrastructure. The second, a peak in global supply, is based on the fact that most oil producing countries have already reached their peak output and are in a permanent decline. Both scenarios would undoubtedly lead to very high fuel prices and they present a major risk to an industry in which there are presently no substitutes for fossil fuel based energy.

By outlining data concerning global oil production and the expected growth in demand, and by demonstrating that current reserves and future increases in production are based on many uncertain factors, the article concludes that the airline industry must address the issue of energy security in the interest of its own future. The article suggests that the industry should support and adopt measures to mitigate CO2 emissions, which would also lead to a reduction in oil consumption, given the increased political pressure and public awareness with regard to climate change.

... V. CONCLUSION
It has not been the objective of this article to predict if and when global oil production might reach a temporary or permanent peak but rather to outline critical aspects of global energy supply, especially the outlook of production and supply of fossil fuel based products, which are critical to the aviation sector.

The most significant conclusion of the foregoing is that there is a real possibility that global oil production and supply might indeed reach an untimely peak. Such a peak would be devastating, especially for aviation. Timely mitigation measures, namely reducing consumption and shifting to other sources of energy, could reduce the impact. However, initiatives proposed so far have not been implemented, and the current economic slowdown coupled with the fall of the price of oil has shifted the focus away to currently more pressing challenges.

Nevertheless, public sensitivity about climate change and global warming presents an excellent opportunity and platform to address some of the necessary mitigation steps. In applying the principles of good airmanship, the airline industry could seize this opportunity and become an active advocate of both oil and climate-change issues. This would not only restore the industry's reputation as an environmentally conscious player but would also extinguish a potential threat.

World oil production has stagnated since 2005, despite record high oil prices, oil industry profits and investment in exploration and production. There is overwhelming evidence to suggest that world oil production is at or near its historic peak and will most likely begin to decline within several years. Net exports of oil available on the world market have already commenced a terminal decline. It is likely that the decline rate for oil exports will be greater than production declines. Australia is already highly import dependent and will be increasingly so as domestic oil production continues to decline after peaking in 2000. This leaves Australia vulnerable to the impact of geopolitical circumstances, extreme weather events and other economic trends on world oil markets. The decline in oil availability will see dramatically increasing and highly volatile oil and fuel prices, oil supply shocks and impacts on economic growth, employment, demographics and transport patterns.

Steep increases in oil prices since 2005 have had an economic impact similar to the 1970s oil shocks, including reduced demand for road and air transport and negative economic growth. Given that world oil production is peaking, the global recession is perpetuating a ‘bumpy plateau’ cycle of oil price increases, recessions and temporary economic recoveries, which will hinder the world economy for the foreseeable future.

Aviation is totally dependent upon petroleum fuels, with no viable replacement likely to be developed for the foreseeable future. As world oil production peaks, so to will the availability of aviation fuel. Increases in fuel efficiency will be insufficient to allow the continued growth in demand for air travel. With no viable alternative fuels that can be produced in anywhere near the volume required this will lead to a decline in air travel. This coupled with falling demand as a result of the socioeconomic impacts of peak oil lead to the conclusion that peak oil will also mean ‘peak aviation.’

The Aviation Green Paper forecasts perpetual growth in aviation demand for the foreseeable future. This is based on a number of assumptions, both stated and unstated, that are being invalidated by current events. With no mention of peak oil, or how its impacts will be mitigated, this leads to the unfortunate circumstance where the National Aviation Policy is likely to exacerbate the impact of peak oil on the aviation industry while avoiding the need to develop alternative transport modes such as high speed rail. This will likely leave Australians in the unfortunate situation of having a failing aviation industry with insufficient alternative transportation infrastructure. This situation is however avoidable if peak oil mitigation measures are implemented on a sufficient scale in an urgent manner.

Based on a detailed analysis of the likely impact of peak oil on Australia’s domestic aviation demand, it is likely that over coming decades there will be significant declines in air travel. Three plausible scenarios are depicted in the following chart: