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The 2008 oil price spike and the airline industry

(originally published in the Annals of Air and Space Law, Vol. XXXIV, [2009], McGill University, as The Oil Price Spike of 2008: The Result of Speculation or an Early Indicator of a Major and Growing Future Challenge to the Airline Industry?)

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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.

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.

Bio: Charles E. Schlumberger, a Swiss national, is the Principal Air Transport Specialist of the World Bank (WB) in Washington DC. Prior to his appointment to the World Bank in 1998, Mr. Schlumberger has held the position of Vice-President at Union Bank of Switzerland, responsible for international credit restructuring. Prior to his activities in financial institutions, he was the CEO of a Logistics and Transport Group in France, and worked as a lawyer on aviation related matters in Switzerland. Mr. Schlumberger graduated in 1986 with a Law Degree from Basel Law School, focusing on Aviation Law and Bankruptcy Procedures, and he received an MBA from the Harvard Business School in 1989.

Editorial Notes: Posted with permission of author. Article will appear in Annals of Air and Space Law: Vol. XXXIV (2009). -BA

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