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4 Major Fluctuations in The Oil Prices

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Since we started to use massive quantities of oil, the price has gone up and down significantly. The main reasons are the demand of the market, and the supply from oil fields and their locations, as we know friction between countries has been one of the key factors in the fluctuations of the prices. Oil prices fluctuations over the years Taking into account the elapsed time from the 70’s to nowadays there are 4 major fluctuations in the oil prices and most of them are related to war, even if the closest to our days is about demand and supply. Table 1 (2018)

1978 to 1988: Iran revolution and Iran-Iraq war

The Iranian Revolution started in January 1978 and came to an end in February 1979, when the monarchy collapsed. During the revolution, the Iranian oil delivery had a drastic decline by January 1979. Nonetheless, this supply interruption is probably not the principal element bringing oil prices to upraise. Rather, the Iranian failed constancy may have helped to increase the fear of further disruptions and driven diffuse speculative manifestations. The CIA report Iran-Iraq war: Oil facility vulnerabilities and the oil market (2007) states that the world supplies could absorb the loss of both nations’ exports, although we can see in the graph (Figure 1) that the price had a relevant movement.

1990: Gulf War

During this year Iraq started to invade Kuwait. As reported by David Henderson (2014), the United Nations during the same year approved a sanction for everyone who would import oil from one of these countries. Doing this the world oil supply was dramatically cut, so the price of the rest of the supply went up. Iraq was seen as a huge threat not just to Kuwait, but also to Saudi Arabia. The international panorama replied to this aggressive behaviour from Iraq by starting various military campaigns against them.


As described by the oil crisis of the year 2000, Fondazione Filippo Carracciolo (2001) there were more than one main factors that brought us to the big increment of prices during the first year of the new millennium. Overall a net cut of OPEC (Organization of the Petroleum Exporting Countries) production starting from 1999, also stressed that the OPEC supply is unstable during stable delivery from non-OPEC nations. Another important matter was the rapidly increasing of global oil consumption, especially in the USA, followed by significant refineries problems around the globe and really low capacity, level of oil, and refined products reserves.

2008: Oil Shock

As we can see in Econbrowser in an article of James Hamilton (2009) in the previous years the world GDP (Gross Domesti Product) went up suddenly. That rapid growth was the basic element behind the world oil utilization. The Chinese market had the fastest growth during this general period of major oil demand, with an increase in consumption of around 870,000 barrels per day. Yet during those years the overall oil production was steady or at least not growing fast enough. In 2008 the economic problems helped the petroleum price go up. Still, we would need to postulate a second factor behind the price change of 2008, namely, an increase in the price elasticity of demand as consumers had time to make adjustments. U.S. petroleum consumption fell. That plunge definitely represented the lower profit and price-induced changes in use. If we say that one elasticity is to be used to account for the 2008 price and another higher elasticity for 2008, there is an implicit assertion that market participants were learning poorly about the price elasticity of demand. For a pretty long period of time demand was responding less quickly than expected about oil price increases. After that event another very impressive drop in oil use was registered due to reduced incomes and drastic changes in consumption of people’s average daily life.

Mitigation techniques

Business Dictionary (2018) defines mitigation as the elimination or reduction of the frequency, magnitude, or severity of exposure to risks, or minimization of the potential impact of a threat or warning. There are many little expedients that airlines use to reduce fuel during flights, for example, citing The Economist (2015), many budget carriers use winglets that while reducing drag they reduce also consumptions, or EasyJet uses a special paint that make airplanes smother and once again reducing drag. Ticket fuel surcharges: Delta According to BBC website (2016) fuel surcharges are applied to amortise jet fuel price fluctuations. Even if costs did not get really high during last few years there are still many airlines applying fuel surcharges to tickets. As we can see from a Business Inside article of Danielle Muoio (Aug, 2016) at the beginning this additional fee was to contain the losses due to fuel price increase. At the moment the oil price dropped again in 2012 the U.S. Department of Transportation decided that the airlines had to surcharge passengers about fuel just for a reasonable amount to cover the company fuel expenses. Nowadays no many airlines are applying those fees constantly, as we can see from Table 2, extract from Delta website (2018), they are applying surcharges just on tickets of flights originating from Japan. Table 2 (2018)

Reduce use of APUs during ground operations: Alaska Airlines The use of APU (Auxiliary Power Unit) during passenger boarding and mainly previous engine start up is a common use in aviation. The APU is purely a support engine that deliver different service like air conditioning or bleed air for start the main engines. There is an alternative, it is the GPU (Ground Power Unit), if used during long periods of time can give great cut in fuel consumption. One main airline that is trying to substitute everywhere the use of the APU is Alaska Airlines. According to GreenAir online (2008) the airline is improving his fleet of mobile ground-based air units at almost all the parking spots at Seattle-Tacoma International Airport (their base). Of course this units need some fuel to work, but they are diesel powered and spend 10 times less carburant. Taking into account other improvements like replacement of MD-80s with new Boeing 737s (better efficiency due also to winglets) or enhance the use of advanced GPS based navigation techniques, they expect to save around 2.6 million.

Fuel Hedging:

Southwest Airline Looking at Aviation Geeks (2017) Fuel hedging is a big companies mean, airlines for example, to establish a fixed price about fuel over a determined period of time. Not every airline apply this method, it can be risky, the only way to make profit through this way is when the oil price has a big rise and it does not go down for a relative long period. When the fuel stay steady or decrease his price the company will have big loss, because the competitors that are not adopting the fuel hedging method will be able to reduce ticket prices (or at least not increase them). In poor words if fuel hedging is done right is a huge advantage for the airline. If we look at Southwest from the Airline Geeks work of Hemal Gosai (2017) we can easily ascertain that this particular carrier, even during the 2008 crisis was not having any loss. They were continuously making money during the whole period, while other major airlines were having considerable negative financial reports. In this case Southwest, paying just $51 per barrel while the current price was $100 per barrel, survived the period of world financial difficulties with no many problems. Nowadays that price for fuel went down again Southwest risk to lose some money if their fixed price will be over the real price, but just with the time we will have an accurate answer.

Weight reduction: American Airline

Weight reduction is a successful way to reduce the wastage of fuel for an operator. Even few hundreds kilograms less each flight can make a big difference over a big fleet during the year. Lately numerous airlines are adopting this method, in different ways, some in bigger scale than others. Looking at USA we have American Airline, in a TriplePundit article written by RP Siegel (2014), is reported in detail what the company did. Basically they launched a program called FuelSmart, this was a real innovation, because the system takes into account employee suggestions about fuel saving. The program, in between other arrangements, included different ways of weight reduction. In the specific those weight reduction are: the removal of all the cabin equipment in excess; the improvement of cargo containers and catering carts through use of new materials; the reduction of carried potable water and last but not least the implementation of iPad with electronic flight bag integrated, instead of big amounts of paper.

This mitigation techniques are all valid, and in a period like this airlines are also restricted from environmental issues. All this work of renewing technologies and procedures is going to pay off in terms of money and environment. Slower airlines approaching those ideas too late are going to have an hard time to get at the same stages as companies mentioned before.

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