Airlines had a lot of challenges 2 years ago but none more challenging than the volatility and high prices  of oil.  That got a lot easier to deal with as the economies of the world melted down but the price of a barrel of oil is slowly rising again.

Oil went over $90 a barrel this week and it’s likely to go up a bit more.  Why?  Well, it isn’t because demand for it is increasing.  It’s because it is a popular speculation in the markets since it is dollar denominated (priced in dollars) and the US dollar has been pretty weak.  If you got a stack of dollars that, in the world market, is eroding in value, speculating oil (rising in price) can be a smart hedge against that loss of value.

Will it rise again to $140+ soon?  That’s anybody’s guess.  My guess is that it won’t go that high but I don’t think it is going to sink to $50 or $60 a barrel either.  Our world economies have stabilized in their fall but they aren’t necessarily robustly growing either.  Lots of countries have bought US debt and have a lot of dollars or dollars invested in that debt and they need to mitigate against the low value of the dollar to preserve their money. 

Oil speculation is starting to resemble speculation in gold and while I do think that we need to stabilize that market in the future, it requires the cooperation of *all* the major oil producing countries and that’s a tough thing to get. 

Airlines are, hopefully, already engaged in strategies to mitigate against fluctuating fuel prices through hedging.  They’ve got some profits coming in now and they can rebuild their cash holdings and start planning their fuel strategies with a more long term view.  Or, at the least, most of them can. 

Ultimately, oil prices will stabilize when the US (and the rest of the western nations) have stabilized their economies, their currencies and have a more solid foundation on which people can plan their investments.  The more uncertain the economies are, the more uncertain oil prices are going to be. 

The United States has largely stemmed its economic free fall and has even enjoyed some very modest gains in growth and unemployment.  The current administration hasn’t received the credit it deserves for reacting quickly and forcefully and without reserve.  Had they not done that, oil would have been much cheaper but only because we would be in a great depression and experiencing deflation and double digit unemployment. 

But this problem isn’t going to go away for at least 5 to 7 years.  Oil will be unstable and fluctuating for some time to come and airlines would be wise to deploy a long term strategy to cope with that.  Fuel hedges and renewing fuel inefficient fleets are the best way to go and waiting even a short while could end up costing airlines all their profits.

Filed under: Airline News by ajax