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Peak Oil: The Coming Global Crisis and the Decline of Aviation

By Drs. Alex Kuhlman
October 29, 2005

Although debated and denied frequently, a massive shortfall in oil production is coming faster than many are willing to admit. Drs. Alex Kuhlman assesses the situation and its effect on the airline industry, and reminds us to start thinking about tomorrow.

In the last few months, there has been increased media coverage about record high oil prices and future global oil production. Inevitable tightening of supply is destabilizing oil markets, which now exhibit extreme price responses to the smallest of disturbances. Interestingly, very few people know that world oil production is nearing its all-time peak, and today’s $60 barrel may seem like a bargain a few years from now. Production in more than 54 of the 65 most important oil-producing countries has already gone into decline, with the Middle East predicted to follow soon. The implications of having less oil tomorrow than we have today are far reaching with a global crisis certain to follow. Energy-intensive industries like commercial aviation will suffer first, followed by other industries, national economies, and the global economy. Ultimately, oil shortages will severely limit the world’s ability to sustain its population as food production relies heavily on fossil fuels. This is not a conspiracy theory or bible prophecy. Rather, it is the scientific conclusion of the most widely respected and conservative geologists, physicists, and economists.




PEAK OIL


The world is not running out of oil, but its ability to produce high-quality cheap and economically extractable oil on demand is diminishing. With great effort and expenditure, the current level of oil production can possibly be maintained for a few more years, but beyond that oil production must begin an irreversible decline. More than 95 percent of all recoverable oil has now been found and approximately 90% of all known reserves are currently in production. There have been no significant discoveries of new oil since 2002. Oil is now being consumed four times faster than it is being discovered, and the situation is becoming critical. It is a problem without a remedy and it is the most pivotal challenge facing modern civilization

ALTERNATIVES


There's no readily available source of energy that can replace oil as it steadily declines over the coming decades. In their present form, alternative energies are simply not capable to replace fossil fuels at the scale, rate and manner at which the world currently consumes them. The public, business leaders and politicians are all under the false assumption that oil depletion is a straightforward engineering problem, but humankind’s ingenuity is unlikely to overcome the basic facts of geology and physics. Fossil fuels allow us to operate highly complex systems at gigantic scales. Renewables are simply incompatible in this context and the new fuels and technologies required would take a lot more time to develop than available and require an abundant fossil fuel platform from which to work.





THE AIRLINE INDUSTRY

The Short Term:

Oil provides 40 percent of all primary energy, and approximately 90 percent of our transportation energy. For most airlines, fuel it is the second largest expense category behind labor. As a direct result of the dramatic increases in oil prices, the cost of jet fuel has more than doubled since the beginning of 2004. The profitability of airlines was already under extreme pressure because of increased competition, overcapacity and lower yields. Furthermore, terrorist attacks have had temporary negative effects on demand in general and on specific routes, while the cost of security has also soared. Once again, the aviation industry is suffering. In recent news, Thai Airways’ chairman and Thailand's finance minister have expressed concerns about the carrier’s future amid rising oil prices. In August the airline announced it had lost 4.78 billion baht ($117 million) in its third quarter after being hit by soaring jet fuel costs. Only a few airlines had the foresight, courage and required funds (or credit worthiness) to hedge fuel prices. Southwest managed to hedge their price at $26 for 85% of its fuel with profits soaring 41% in the second quarter of 2005 as a result. In 2004, Delta Airlines held positions but was forced to sell them in a short-term cash crunch. Those hedges would have protected about a third of its fuel needs. Their share price has collapsed from more than $8 a year ago to less than $0.70 today. Continental has no hedges in oil-futures contracts this year. United Airlines, which filed for bankruptcy protection in December 2002, has 30% of its fuel hedged at $45. Recently, American has cut routes as a result of high fuel cost, while the outlook for Northwest is far from optimistic with shares having dropped from over $22 to less than $4 in the past 12 months while under Chapter 11 bankruptcy protection. Ryanair hedged at around $45, while Easyjet managed to cap at $60. In the short term, hedging has become a crucial part of business for the most successful airlines.

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Airlines with more efficient jets will have a distinct advantage in years to come.
The Airbuses, especially the A380, are going to burn a lot less per passenger-mile than other aircraft.
Photo © Sam Chui


Medium Term:
Within a few years, or even sooner, oil extraction from wells will be physically unable to meet global demand. Prices will soar, fuelled by market-based panic, further hurting the airline industry. In addition, high oil prices will decrease consumer’s disposable income and dampen demand. The number of cash-strapped airlines will increase. The weaker airlines without hedging contracts, that somehow managed to survive in the short term, are doomed to collapse. In addition, higher fuel costs will dilute the competitive advantage that the low cost carriers have. The reason for this is that as fuel cost’s share of total cost increases, the relative share of all other operating expenses decreases, weakening the low cost advantages that these airline have traditionally based their model on. Another possible effect may be a relative increase in short haul travel, at the expense of long haul. The most successful airlines will most likely be the flag carriers from the Middle-East as this region will benefit from the high oil prices, allowing these airlines to go from strength to strength. Emirates have ordered 45 of the new giant new Airbus A380’s, which is key element in the company’s future growth, while experts believe that many Arab airlines will place more orders of Airbus and Boeing in the coming few years.



Long Term:
In a worst-case scenario, the long-term future for aviation is disastrous. As oil prices continue to rise, the world economy will be confronted with a major shock that will stunt economic growth and increase inflation. The chief economist of Morgan Stanley recently predicted that we have a 90 percent chance of facing “economic Armageddon.” During the transition period to a post oil era, there may be massive disruptions to transportation as the global decline of oil deepens. There will be social unrest and a strong reduction of business and government activity and very serious unemployment. Eventually, a large proportion of the demand for air travel will be almost completely destroyed, with the risk of the aviation adventure going out of business, with the exception of perhaps a handful of airlines. Once again, air travel will be reserved for the rich and for government business and the world will become a larger place again.

Solutions Must be Grounded in Science:
If we want to have at least a shot at changing this gloom-and-doom future scenario, it is vital that we fully understand the problem. It is what some call "an outside context problem"—so far from our normal realm of experience that we are collectively having a hard time processing it. The decline of oil is a certainty and is guaranteed by the natural laws that govern our physical world, and nothing in science, technology or engineering can prevent it. The world needs to prepare for a post-oil era and make huge commitments and sacrifices to avoid a deep crisis. With the little time that we have left, we need a well-orchestrated and large-scale intervention by governments from around the world to conserve the underlying fossil fuel base required to develop and implement sustainable energy sources capable of running countries like the United States—or even a substantial fraction of it—the way we are running them now. With a dwindling energy base, we may simply lack the tools and time to replace a fluid so cheap, abundant and versatile.

The traditional view of economists that the ever-insightful market will solve all problems is a fallacy. The supreme goal in all countries to raise incomes, living standards, and the GDP as much as possible, constantly and without any notion of a limit, is unattainable. On current trends, a country like China will be requiring 99 million barrels of oil per day by 2031, while total world production today is only 84 million barrels. Even present levels of production and consumption are grossly unsustainable with a shrinking energy base. The theory that economic stimulus will spur discoveries, and the market will maintain equilibrium, ignores the serious technical limitations of various replacement technologies. Furthermore, it assumes that the supply side can respond quickly in the short term, ignoring the long lead times required for any new oil projects and alternative energy projects to go online (up to 10 years) while disregarding the huge cost involved in modifying the trillion-dollar global infrastructure that was predicated on consistently low oil prices (aviation included). Finally, fundamental economic theory fails to address the laws of physics and thermodynamics. For example, looking at energy equations, to extract oil from the highly glorified tar sands takes two units of energy to produce three units and its net energy value is therefore marginal. In the early days of oil discovery, this ratio used to be 1:20. There will always be large deposits of oil left in the earth that would simply require more energy to extract than they yield regardless of the market price.

We must move quickly towards global regulations that will restrict economic growth and consumption of fossil fuels to allow the transition to a post-oil era to be as painless as possible. At present, it is impossible to get people or governments to even address this issue. However, to avert a future that is so drastically dislocated from the present, we must realign our thinking with our goal and take radical actions on a global scale.




For more information on Peak Oil see www.OilDecline.com.


A Partail List of Sources:

BP Annual Review 2005.
Association for the Study of Peak Oil & Gas (ASPO).
Statements on Oil by The Energy Committee at the Royal Swedish Academy of Science, 2005.
Twilight in the Desert, Matthew R. Simmons, 2005.
The Long Emergency, James H. Kunstler, 2005.
The End of the Oil Age, Dale Allen Pfeiffer, 2004.

Written by
Drs. Alex Kuhlman

Drs. Alex Kuhlman received a Post-Graduate degree in Economics from the University of Amsterdam. He is author of a Peak Oil website and flies commercially for a large European low cost airline.

4 User Comments:
Username: RayChuang [User Info]
Posted 2006-03-18 04:40:34 and read 32768 times.

The important thing is that we are very close to perfecting a technology that will make having to extract kerosene (the base for jet fuel) from petroleum obselete.

A company called GreenFuel Technologies is working on a idea of growing oil-laden algae in large farms of vertical tanks that could yield many millions of liters of diesel fuel and heating oil from large-scale production. With today's refinery technology, the oil extracted from this algae type could be refined into kerosene. Because algae is a true renewable resource, we could get what amounts to an unlimited supply of hydrocarbon fuels.

Username: Flyinag12 [User Info]
Posted 2006-06-15 22:59:11 and read 32768 times.

In regards to the previous post, I think the user is missing the primary point of this article, and the peak oil phenomenon in general: that of the cost of production. Jet fuel needs to be produced on MASSIVE levels to sustain the air transport system. I doubt that algae can produce the needed amounts of fuel for air travel. Although I am not as familiar with this production method, the cost per unit of producing kerosene using algae is almost sure to be exponentially higher than that of refining it from "cheap" crude harvested from oil rich regions of the world, such as the middle east, due to this problem of production amounts. This is the same fallacy to the argument of using ethanol grown from corn to fuel cars. Ethanol would be relatively far more expensive than oil-based gasoline, and also misses the point that modern agriculture is dependent upon oil (petroleum based fertilizers, pesticides, and oil-powered equipment).

To all who are interested in aviation, this is THE most serious concern mankind has ever faced! The potential effects of the decline of oil are disastrous if we do not act immediately to save our way of life. Unfortunately, I believe we are living in the heyday of air travel. With the near impossibility of finding a cheap fuel that has the high energy density of oil (weight being the biggest limitation to aircraft performance) any time in the near future, airplanes will go into decline. My prediction is the advent of a massive high-speed maglev train system set up around the united states, powered by electricity from nuclear plants, with air travel being used by the very wealthy and by those wishing to travel to smaller destinations off the maglev grid (in other words, say bye bye to the airlines).

I know I will probably get blasted on this forum (an aviation forum) for talking about the end of large scale air travel, but Im just speaking the truth so that we can prepare and work hard to save the amazing dream of flight. I fly corporate jets for a living, so no one will be hurt more, both financially and emotionally, by this terrible potential long term outcome.

Username: Airliner23 [User Info]
Posted 2008-05-09 14:21:44 and read 32768 times.

It looks like we might have to use another type of fuel someday.

Username: Drhall [User Info]
Posted 2008-06-10 07:07:23 and read 32768 times.

Algae production is infant facing goliath demands, ask yourself why that is?
As the leading technology of answer, why do we now ask "Where Oil Go?"

Currently, there is little hybrid technology going online, injecting hydrogen into hydrocarbon fuels, etc. almost zero electric motor research, and current maintenance has hit bottom of corporate funding ... note large number of "retired aircraft", particular models and ages.

Who stands to benefit from high oil? Those who will have the cash in the end to travel using petro!

1.) The industry must realign itself with reality - prices MUST reflect economic basis, who cares if oil is $200 barrel, the public cannot afford it, the airlines certainly cannot afford it, so there opens a new paradigm ... as a petrol based industry, it's over weaver!Enter algae - fastrack the technology, it is so very sorely lacking in support and funding (wonder why the lobby boys do not see it that way?)

2.) The post announcing end of large scale flying is so on target it will shake the mass public, why is that? People have used to subsidized fuel, we pay for fuel that has never been priced according to its true cost ... the carbonbased fuel economy is a smoke&mirrors and always has been, Subsidized, Directly and Indirectly, and now bites the many hands that fed it, aka Prefrential Tax Treatment (11% vs. 18%), (Koplow '93), State and Local Tax Preference (3% vs. 6%) Loper '94, Infrastructure subsidy (Delucchi-transportion only- '95)through user fees, highway fees, Stategic Petroleum Reserve, Gas taxes, tolls, registration fees ... just a very few citations, very few!
3.)Take your airplanes and retool them, refuel them and start flying with planes that make sense, dollars and cents! (Too many seats for one, the aircraft should hold no more than fifteen people-everybody flys First Class)(Too many destinations for another, no aircraft should fly more than two ways on any given route)(Better maintenance schedules, better pilots - not worked like donkeys, we have excellent mechanics and idiots for managers)
(Mechanics who point out needed downtime maintenance being chastized and fired when possible)
4.)Who better to run an airline than a board of directors who live in Peter Pan World? Give us a board that has worked on a plane, served drinks to rotten mouth clients, sold tickets to irate customers, looked for lost luggage containing diabetic pills, and clocked 16 hr days!
5.)Algae busters? Get a grip - there is nothing presently out there that represents the hope and benefit of this incredible technology.

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