Out: Peak Oil.
In: Peak oil demand.
And it’s good news for the airlines and travelers, and bad news for the aircraft manufacturers:
The losers in this scenario would be aircraft manufacturers, which have built up record backlogs on a cocktail of high fuel prices, low cost of capital, and new technology. Lower oil prices mean new aircraft models promising 15-20% fuel consumption reduction are not as attractive from a financial perspective. Coupled with the current trend of increasing cost of capital, this could mean a wave of cancellations of sexy new aircraft models. Or it could mean manufacturers need to revisit pricing assumptions. What is a fair price for a new widebody like the Boeing 777X, for example, in an $85/barrel world where its annual fuel cost falls by $3-4 million?
All is happening as I have foreseen.
I don’t know if you caught this, but a couple of days ago in Japan another 787 battery smoked.
Reuters link.
I did see that. It’s kind of ironic that Boeing went all in to make a “green” airplane that’s having serious teething problems, just at a time that such a thing may not make economic sense due to falling energy prices.
David Berg at Mad Magazine had his cartoon of “Everyman” at the wheel of his car, explaining to his passenger his take on (Vietnam) War protestors.
“People who are protesting the War are driving with their lights on. I, for one, support the war effort and will be driving with my lights off!”
“At night?”
Just because every nut case, pinko, shirker, and self-loathing American was against the War didn’t mean that prosecuting the War to the last drop of American blood and the last of our financial resources was a great idea. Just because every smug Liberal and scientist jealous of their funding is trying to rub our faces in Global Warming doesn’t mean that Boeing building a fuel-efficient jet is a bad idea.
What is Boeing supposed to do? Bring back the “straight jet” 707 to prove to someone that fuel can be consumed with impunity? Are we supposed to make a point by driving with our lights off . . . at night?
A fuel efficient jet within the economic limits of technology has always been a good idea. Lower oil prices may even be good for Boeing. Why? Because if oil prices stay high, the pressure to keep airline fares high will be on, there will be diminished air travel or growth in air travel, and the airlines won’t need new planes. If oil prices come down, there will be increased demand for air travel and new planes, and given the large fraction of an airline ticket that pays for fuel, the 787 may be a good economic trade between capital cost and fuel expense, even at slightly lower oil prices.
The battery in the 787 is not an essential piece of not-ready-for-prime-time tech like the traction battery in a Tesla — that battery is for an auxiliary function. Maybe Boeing tried to shave a few pounds to optimize their design with that battery, but a lower-tech heavier battery could substituted without a noticable penalty in performance of the airplane.
Paul, my point is that they might have spent a little less money on development and not pushed the design quite as hard for efficiency if they thought that demand would be reduced as a result of cheaper kerosene in the future.
All they’re suggesting is that if the price of jet fuel drops a significant amount, it might not make economic sense for an airline to upgrade its fleet to more fuel efficient planes. They may try to get some more use out of their existing fleet which could cut into new aircraft sales. New planes are more expensive than just their acquisition cost. You have to factor in training for air and ground crews as well as changes to repair tooling and equipment as well.
The 787 uses large batteries in place of the normal turbine-powered APU. If there are problems with that, it’s a big deal. The 787 uses electric systems far more than most other airliners.
I’m not very impressed by the article or the analysis. Fracking (really in the article, they mean fracking combined with horizontal drilling) has the beneficial side effect of producing lots of natural gas, but it is used to extract oil. Companies like Devon, Chesapeake, and EOG have realized that just because they can produce lots of oil and gas, there is no need to drain their proven reserves just because they can while prices drop. Further, the article tuts the accomplishments of these companies, and then shifts to acting like Saudi still controls what happens next. But let’s look at what’s really happening.
The price of oil is dropping, because it is being supplanted by gas in the US. That part of the article is right because it is now a common fact. The US is quickly going from an importer or natural gas to soon exporting it. With adequate supplies of natural gas, standby oil generators are needed less often, thus decreasing industrial demand and lowering prices. So the Economists analysis is that the Saudis might try starting a price war to increase oil demand? Whose demand does the Economist think will increase in such a scenario? Apparently not China and India, because they just shot that down. And apparently not in the US, because of Hybrid! (sales decreased in 2013) and diesel (sales increased in 2013, but diesel is oil). So the Saudis are more likely to hold their reserves and decrease production to drive up prices rather than race to the bottom.
Also, I think the assumptions about China and India are wrong. China’s auto sales are still growing at double digits (14% just last year). India is slowing, but that’s because they have a poor road way system and lack of desire to improve it. Both nations have a growing need for industrial and residential energy. Coal is important to them, but one look at China says that can’t go on much longer. So they’ll need to switch to oil and gas sooner rather than later, and that will increase demand regardless of what the Saudi’s do.
Finally, much of the Economists analysis is based on a previous assessment that suggested the majors were in trouble. Well, ExxonMobil’s stock grew over 15% since that first article was written in April 2013, and the same goes for Shell, BP, and Total. Only Chevron didn’t experience such growth, but then Chevron went through 4 cycles this year of that fluctuated the stock more than 10%. In fact, the majors and the “Frackers” performed roughly the same with the exception of EOG, which was the first to announce an intentional slow down of production. EOG’s stock grew over 50% since that announcement.
“What is a fair price for a new widebody like the Boeing 777X, for example, in an $85/barrel world where its annual fuel cost falls by $3-4 million?”
Yeah! Who wants to make an additional $3-4 million per aircraft per year; with lower maintenance costs, more flexibility, faster turnaround, 21st century connectivity, improved safety and customer appeal?
Someone who didn’t spend $250,000,000 on a new 777 a few years ago?
BTW, I’m not sure I’d consider the Doomliner to have ‘improved safety’ when it has a proven tendency to catch fire. I won’t be flying on one for a few years.
Now let’s don’t get our 777s and 787s mixed up. BTW, I don’t believe any lives have been lost because of the 787 growing pains. Care to enlighten us as to those aircraft designs that had no problems at all?
I don’t understand your comment about 777 and 787. If I just spent quarter of a billion dollars buying a 777, why would I then rush out to buy a 787 to replace it, to possibly save three million a year, assuming it ‘s not grounded due to catching fire again? Airlines keep old jets in operation for decades, they don’t just scrap them as soon as something more efficient comes out.
How many other aircraft cleared to fly hours from the nearest airport have had multiple on-board fires due to manufacturer installed equipment?
Well the issues started way back. While Airbus continues to pursue the traditional spoke-hub model Boeing came with that vision of doing point to point flights everywhere. This was partially because of the success of companies like Southwestern Airlines and the ilk, which are big customers of theirs, all of which use point to point flights. At one point Boeing tested the waters for the Sonic Cruiser. Remember that? Since people were so concerned about fuel prices back then they backpedaled to the 787 Dreamliner concept. Airbus is pretty conservative so they did not buy into this nonsense and tried to make the A350 as cheap as they could. Al-Li construction, reuse as many components of the A330 as they could, etc. The airlines threw a hissy fit at it and demanded that Airbus provide them with a ‘modern’ plane with composite construction more electrical subsystems etc. Well Airbus did concede. A lot. Guess who were right in the end? Airbus themselves estimated that going from Al-Li to composite would save nearly nothing in weight at the expense of airframe maintenance problems. Well the airlines are reaping what they deserved.
Peak oil has come and gone, we didn’t even notice it as such.
That oil was the stick a pipe in the ground and too cheap to meter oil emerges freely, to be sold at whatever price, mostly below $10/barrel.
That oil has peaked.
But in it’s place, is orders of magnitude MORE oil which can be extracted for $25 per barrel, and $50 per barrel. And at $100 per barrel, there’s plenty. At $200/barrel, more still.
But as the price of oil increases, it’s relative VALUE doesn’t.
So what we will see is that petroleum will not be the cheapest way to produce liquid fuels, and soon.
No one will notice except the Saudis.