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Middle East erupts – so where are the big fuel surcharges?

July 9, 2014 Destination Global, Headline News No Comments Email Email

egtmedia59Outbreaks of instability and conflict in the Middle East customarily trigger wild fluctuations in oil and aviation fuel prices, followed quickly by airlines imposing fuel surcharges.

The oil-producing Middle East is going through a period of extreme turbulence – yet oil prices and airfares seem to be riding it out. What is going on?

The unrest is certainly there. In Iraq, a militant Islamist guerrilla army is preparing to move on Baghdad. The Syrian civil war drags on with vast numbers of desperate refugees fleeing the country. Turbulence erupts periodically in various other Middle Eastern countries; oil exports from Libya have been slashed by protests.Oil production

Analysts say several factors are helping stabilise the price of oil, and with it, airfares.

They include:

  • The major Iraqi oil fields producing for the export market are in the south of Iraq, which remains firmly in the hands of the government. The ISIS rebels hold territory in the north of Iraq.
  • Saudi Arabia is no longer the world’s biggest oil producer – and neither is any other country in the Middle East. The world’s largest oil producer is the United States, which has overtaken Saudi Arabia and Russia in the league, largely through the extraction of energy from shale rock.
  • Spikes in oil prices are often driven by fear rather than reality and the dominant position of the US is helping calm fears.

Bank of America says US production of crude oil, together with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter. The US became the world’s largest natural gas producer in 2010. The International Energy Agency confirmed in June that the US is now the biggest producer of oil and natural gas liquids.

The US has so much oil that Citigroup estimates the country could potentially export 1 million barrels of crude a day, including 300,000 of condensate, by the end of this year.

Other major developments also may help keep oil prices down. The price of batteries is considered likely soon to fall. Tesla Motors will later this year start building its Giga factory, the world’s largest battery factory. This colossal, USD 5 billion enterprise in New Mexico will produce batteries for 500,000 electric vehicles by 2020. Tesla expects to send the kilowatt-hour price of batteries down by 30% by 2020, when it will produce more lithium ion batteries annually than were produced worldwide in 2013.

Tesla also plans to address the solar power industry’s need for a massive volume of stationary battery packs. Panasonic, Samsung and Apple have been mentioned in connection with the project. Tesla’s affiliated company SolarCity has already started deploying Tesla-battery-pack-based energy storage systems combined with solar, for both residential and commercial applications.

Advances in solar photovoltaic panels, along with the coming cheaper batteries, could mean that within a few years, batteries coupled to solar panels prove cheaper for many homes and businesses than being on the electricity grid. That would mean more people leaving the grid, making it harder for power companies to recoup their costs, which would in turn put electricity bills up, thus driving more people to leave the grid – the classic death spiral.

Aircraft are not going to fly on solar power anytime soon – if ever. But any major trend towards solar or other non-fossil fuels will not only help the environment, it will help stabilise the price of oil. Eventually oil may be used for vital purposes, such as plastics, lubrication and helping power aircraft, rather than just being burned to produce power.

In the shorter term, however, the price of fuel does go up and Emirates recently increased its fuel surcharge to reflect that. In May, the Dubai-based airline revealed its fuel costs had risen 10% in the 2013-2014 financial year. Qantas passengers thus face a fuel surcharge increase on some parts of the joint network with Emirates. The rise, imposed yesterday, affects Qantas and Emirates services to Europe, North Africa and the Middle East.

The one-way surcharge in economy class rises by AUD 15. Compared to some of the airline surcharges seen in previous years, that’s not much.

Written by : Peter Needham

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