Oil, TravCorp USA President Richard Launder confided in me a couple of weeks ago, "is our industry's Achilles' heel."
I think we all would agree with that observation. The price of oil, it seems, has become a dire threat to the health of our entire industry. What's causing it? Is it simply demand-driven, or is it a speculative bubble?
First, some context: As a result of oil's insidious ascent, much of the U.S. airline industry is being dismantled as carriers park planes and watch helplessly while billions more dollars whoosh out the exhausts of their remaining jets than come in via fares.
The fate of the airlines is of great consequence to the rest of the travel industry. Fewer planes in the air means fewer people flying. It's as simple as that. Well, actually it's not quite that simple: Reduced supply also leads to higher fares, which means even fewer people flying.
High oil prices also portend other negatives for travel, from higher cruise costs to more complicated tour planning to keeping up with an ever-growing list of fuel surcharges.
Part of the blame for oil's rise can be placed on the weakness of the U.S. dollar. Since weak dollars buy less relative to other currencies, oil must go up whenever the dollar goes down. But it's hard to see how the combination of a declining dollar and modest increases in demand could cause such a breathtaking rise.
Indeed, both the scale and speed of oil's surge would be hard to overstate. The price of oil has nearly doubled compared with a year ago, when it was trading at $67 a barrel, and it's risen nearly 50% compared with three months ago, when the price stood at $95.
What's more, during the past several weeks, oil has gone completely haywire, whipsawing from $121 a barrel to $138 or more, and spiking by nearly $11 in a single day. (And who knows what it's done between press time and now.)
Methinks something is rotten in the state of Denmark -- or, to update Shakespeare, in the trading rooms of New York and London.
The level of volatility and price hikes we've been seeing in the oil market cannot easily be explained by normal supply-and-demand patterns; rather, the current scenario suggests the hand of speculation.
Traders -- or more likely, their sophisticated, computer-driven pricing and trading systems -- have turned oil from a reality-based commodity into an abstract reference point to be manipulated at will by uncaring mathematical software models. Or maybe oil has become more like a football that makes money for the traders every time it gets tossed, kicked or slammed.
Unfortunately, travel and tourism are on the receiving end of these manipulations.
If oil keeps climbing, a major contraction in air travel, among other negative impacts, will land squarely in our laps.
Given that the cost of a barrel of oil has climbed every year since 2001 (when it traded at a mere $23), it's easy to feel all gloomy and doomy.
But my conversations with several economists and analysts in the past couple of weeks have been more reassuring than I might have expected.
They rightly note, for example, that speculative bubbles have a way of bursting. Anytime prices become untethered from the fundamental laws of supply and demand and expand into a bubble, that bubble is destined to burst eventually.
The problem is, we don't know for sure that this will happen. And if it does, we don't know when. So we have no choice but to do business with the assumption that the price of oil will remain high until further notice.
A pox upon thee, evil speculators!
Contact Lester Craft at [email protected].