Airplanes And Oil Prices


While those of us in the cheap seats uniformly cheer for low oil prices because, well, we can buy more gas and fly more, what if the reverse were true? What if anemic oil prices are the cause of declining aircraft sales? Writing this week in Aviation Week, the Teal Group’s Richard Aboulafia made this very argument, albeit one that applies to high-end business aircraft.

Transposing the curves of global oil prices over those of business aircraft sales, Teal finds a fit. When oil is high, or at least higher than the under-$50 average price now extant, sales of high-end aircraft boom; low oil prices have tended to diminish demand. Indeed, for virtually all aircraft, production has yet to recover to pre-2007 levels and since the last oil peak in 2011 ($119), prices have retreated steadily and sometimes dramatically.

Quoting Bank of America/Merrill Lynch analysis, Aboulafia says there’s a correlation between high-end business jet demand and oil prices. Demand rose after the 2008 economic crash just as oil prices did; now as oil prices retreat, so does luxury jet demand. The underlying support for the argument is that resource-rich countries like Russia Middle Eastern states are prime buyers of large, cabin-class jets and when oil prices tank, so do sales.

The correlation is interesting, but I’m not sure I’m convinced. In any case, it’s marginal to the industry as a whole. According to GAMA figures, overall business jet demand has been essentially flat since 2011, but was slightly higher in 2015 than in 2011. The more bracing eye opener for me is the global volume in billing numbers. In 2008, general aviation delivered 3970 aircraft for $24.7 billion in orders. In 2015, it billed $24.2 billion, almost as much, but for 2331 airplanes, ergo, fewer airplanes for just as much money. That’s the perverse world of aviation supply and demand. When demand goes down, prices go up.

Piston sales have clawed back from a low of 889 in 2010 to 1056 in 2015, but they were higher (1129) in 2014. I couldn’t even venture a guess if oil prices have affected sales. New piston airplanes have become primarily a training market so with oil prices soft, do enough more people buy airline trips to spike demand for more pilot training? Maybe, but that’s a claim too tenuous for even a Sunday evening blog.

In the shorter term, lower avgas prices should, theoretically, increase flight activity which, in turn, should boost avgas demand. If this is true, I’d have a hard time proving it. I had a look at the Energy Information Administration’s graph on avgas deliveries and it was flat through 2015, after a sharp decline since 2012. Not that I’m sure how reliable this data is, anyway. Digging into the source tables, you could once find the underlying data supporting these reports. But for the past couple of years, much of it is being withheld, probably to protect proprietary reporting in a continually declining avgas production ecosystem.

The silver lining, if there is one, is that oil prices, such that they can be reliably forecast, seem unlikely to rise sharply for the short term. Lower gasoline prices have spurred driving demand in the U.S., but overall oil demand remains tepid and supply is fat. OPEC, once the fearsome overload of oil production, recently announced a half-hearted plan to cap production in support of price buttressing. This will cause dancing in the streets in Eagle Ford and Bakken but, I suspect, not much change in overall price.

If I were betting, I’d say avgas prices will remain stable for quite some time. That’s not to say low oil prices are an overwhelming benefit for the world economy, but if I don’t focus on my selfish little self-interest here, I’ll never get rid of this splitting headache.

Night at the Movies

Clinging to the oil topic here, I’ll veer toward the shoulder for a few sentences in noting that Deepwater Horizon, the movie, opened over the weekend. When I was lad growing up in the Texas oil patch, I once witnessed a well blowout. The sight of 30-foot sections of drill pipe arcing through the arid sky tends to stay with you.

In depicting the physics of such a calamity, the filmmakers and script writers deserve a nod for not dumbing it down too much for the audience. I have more than passing knowledge of this technology and I had to pay close attention to keep up with the detail. Even with the inevitable artistic license, it was gripping. It’s worth seeing.