How the High Price of Oil Is Reshaping the Travel Industry

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The end of the era of cheap oil is transforming the businesses and destinations that comprise the global travel industry. Economist and energy expert Jeff Rubin sees a not-so-distant future where airfare costs will skyrocket, airlines will of necessity focus on high-load hubs, and international travel will become “rare.” 

On the upside says Rubin, author of several best selling books, including The Big Flatline: Oil and the No-Growth Economy, (Palgrave MacMillan, 2012), local travel will experience a renaissance that will revitalize or enrich many destinations and travel-related businesses.  

This is the second excerpt from a dialogue between Rubin and Travel Weekly PLUS Editor in Chief Diane Merlino. 

Merlino: Most businesses in the travel industry are reliant on oil, either directly or indirectly. What impact will a limited and more expensive supply of oil have on the travel industry, particularly in the context of a static or slow-growth economy in the U.S.?
Rubin:
I see two fundamental shifts happening. First of all, people may have more leisure time in the future. I think job sharing is going to become a feature of the labor market in North America just as it already has in places like Germany. So people may have more leisure time as a result. At the same time, the revitalization we are going to see in local economies is also going to be true for the travel industry. 

As your question points out, the travel industry is extremely oil intensive, whether that’s about flying off to Peru to hike Machu Picchu or going on a cruise ship through the Caribbean or flying to Australia to check out the Great Barrier Reef. We’re going to find that it becomes prohibitively expensive to do those things. There’s going to be JeffRubinHSfewer and fewer airlines offering those kinds of choices. But that doesn’t mean people aren’t going to be interested in taking vacations. As with all things, where you see increased costs you also see opportunities. Maybe people will spend more time looking at their local environment. 

When I was a kid I went to Kashmir and Thailand. Maybe my kids will go canoeing in Algonquin Park, which is 200 miles north of here. If I live in New York City, instead of going on a bike trip through Tuscany maybe I’ll go up to the Catskills. Then, all of a sudden, you’ll see a revitalization of the tourist industry in the Adirondacks. As the demand for foreign travel is likely to fall, people are likely to spend more time and more money on local travel and local vacations. 

Merlino: What are your thoughts about the impact of increased oil prices on the cruise industry in particular? A lot of new inventory has been added in the U.S. and Europe in recent years. Four new megaships launched in the U.S. last year and two in Europe. Four more megaships are set to launch this year, and four more in 2014. They all need oil for fuel.
Rubin:
There’s two ways that oil can hurt that business. The first way is the direct cost of moving that cruise ship. The second way that oil can hurt that business is by creating recessions in countries where people are booking those cruise ships. I guess an interesting question is, how recession proof was the cruise ship industry the last time around? Maybe relative to total cost, transport cost doesn’t matter for that business. But in 2012, we saw the highest average oil prices; Brent [Brent Crude, a global oil trading price benchmark] averaged $112 a barrel.

Merlino: You say in your book that international travel will become rare due to increased prices and reduced supplies of oil. How might that affect air travel?
Rubin:
For cruise ships, maybe transport cost relative to total cost is not transparent. But for airlines, what fuel costs mean for profitability is very transparent. That’s really the hub of the problem for all transport sectors — that we don’t have an alternative for oil as a transit fuel.

Air is the most energy-intensive form of travel, and in a world of triple-digit oil prices that’s very problematic for the industry. Not to say that people won’t continue to use airplanes, because of course they will. But the relative price of flying has fallen dramatically since the 1970s, and I think air prices are going to go right back up there with where oil prices are going. So, people are going to have to have special reasons to fly.

I don’t see very much growth in the industry. I don’t think there’s an airline around that can make money with Brent [Crude] being north of $80 or $90 a barrel. Ultimately, we’re going to see fewer people flying, and certainly fewer BBoildrumsRubinpeople flying to anywhere other than high-density hubs, which is going to make it more difficult to go to Chiang Mai or Lima. 

Merlino: What’s your perspective on how the oil situation will affect destinations, particularly those that rely on an international visitor base?
Rubin:
When airlines look at how load factors and fuel costs are impacting profitability, I think you’re going to see them retreat to high-load flights between hubs. You’re going to see the deterioration in service, or the disappearance of service, on more marginal routes. That’s why I said in my first book that there’s probably going to be fewer choices to fly to Nairobi to see the Serengeti. There’s going to be fewer and fewer people flying on those routes. And, of course, the less people there are flying on those routes, the higher the cost will be.

Merlino: What you’re describing here sounds like it could put a lot of travel companies out of business.
Rubin:
It might. But I think a lot of our tourist industry left, and just as there will be a reshoring of the manufacturing sector, I think we’re going to see a renaissance in the travel industry as well. Are you California based?

Merlino: I am. I’m in San Francisco.
Rubin:
So, just because people won’t go to the Serengeti or won’t go biking in Bordeaux, maybe they’ll go biking in Napa instead. Maybe they’ll be more Madrona Manors or Sonoma Mission Inns because people won’t be going to Tuscany. If you’re in the Butterfield & Robinson back-road, high-end bike trip to Tuscany segment, maybe you’ll go under. On the other hand, if you’re doing local bike trips through Napa and Sonoma, maybe your business will grow.

Merlino: What’s your best estimate on the time frame for some of these trends you’re predicting — increased airfares, more local travel?
Rubin:
The time frame is now. Brent’s at $117 a barrel. What’s particularly interesting is Brent’s at $117 a barrel with an anemic global recovery. I’m not just talking about the U.S.; global GDP has been anemic.

World oil prices are in the triple-digit range. And they’re in the triple- digit range precisely because of the places that we’re now looking for oil, whether it’s shale oil in the Bakken, bitumen in the tar sands, or oil in the Arctic deep water. None of that stuff is going to flow at $40 a barrel, apart from the environmental costs that they all bring.

NEXT WEEK: How soaring oil prices and the slow-growth economy will make life better for everybody. 

ALSO SEE: Part one of the interviews with Jeff Rubin, Forget About Booming Economic Growth. Welcome to ‘The Big Flatline’
Image of oil drums provided by Shutterstock.
 

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