Oil price drop could be short-lived, group warns

By Matt Thurber

October 6, 2008
Fuel

Oil prices have slid back since reaching a peak of $145 a barrel in July, resulting in jet-A prices finally falling by a significant amount. Although they remain sharply higher compared to this time last year, retail jet-A prices at U.S. FBOs have dropped in many cases below $6 per gallon. And while some FBOs at major U.S. airports are still charging about $8 per gallon for jet-A or even higher, if oil prices remain near the $100 mark, retail jet-A prices should continue to fall.

According to information from the U.S. Energy Information Administration (EIA), jet-A prices skyrocketed from December through July of this year. The prices shown in the chart accompanying this article are before adding in taxes, airport fees and retail markups, but they are useful because they offer a snapshot of fuel pricing for the past 33 years. (The prices are adjusted for the U.S. consumer price index.)

It is interesting to note that in 1981 jet-A prices reached an inflation-adjusted high that wasn’t exceeded until late last year. Through 2006, jet-A prices remained fairly stable, and were likely at least partly responsible for the growth that has occurred in business aviation. Although it is impossible to connect higher fuel prices directly with reduced activity, in the past year charter flying has decreased, some say by as much as 20 percent, and business aircraft flying has also dropped off.

In August, UBS Investment Research reported that business jet flight activity was down 7 percent year to date. For the month of July, flight activity declined 11 percent from the same month the previous year. The largest declines have occurred in short-range aircraft, down 10 percent through July, according to UBS.
Medium-range aircraft activity is down 5 percent and long-range aircraft down 3 percent. At three busy airports, business jet flight activity also dropped. Teterboro Airport in New Jersey is down 4 percent, Westchester County in New York 8 percent and Washington Dulles 9 percent, year to date. Charter activity is down 12 percent year to date, according to UBS.

During the first half of this year, global oil consumption rose by about 500,000 barrels per day compared with the previous year, according to the EIA. The newest figures include an 800,000-barrel-per-day drop in U.S. consumption. This was “the largest half-year consumption decline in volume terms in the last 26 years,” the agency said. Even though global consumption is not expected to rise as fast as previously estimated, increased consumption in China, the Middle East, Latin America and India will offset the lower numbers in the U.S. and other countries. Oil prices, therefore, will likely continue to climb, averaging $119 per barrel this year and $124 next year, according to the EIA, up from $72 per barrel last year.

“There is also a risk that any weakness in oil prices could be minimal or short-lived,” the EIA added, “especially if consumption growth exceeds current expectations or if oil production capacity expansion plans in either OPEC or non-OPEC nations turn out to be lower than expected. Supply risks in Iraq, Nigeria and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations. In addition, OPEC production behavior that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure.”  

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