Appendix A: 55 Trends Shaping the Future of the Hospitality Industry, and the World

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Implications for hospitality and travel: There is at least some hope that oil prices will stabilize at livable levels within the next few years.
32. When not perturbed by greater-than-normal political or economic instability, oil prices average around $65 per barrel.

New energy demand from the fast-growing economies of China and India has raised the floor that until 2004 supported oil in the $25 per barrel range. Nonetheless, the spike in prices to nearly $150 per barrel in mid-2008 was an aberration. At least four factors contributed to the bubble in energy prices: Perhaps 30 percent of the increase in oil prices to their June 2008 high stemmed from the long-term decline in the value of the U.S. dollar on foreign exchange markets. Another $10 to $15 per barrel represented a “risk premium” due to fears of instability triggered by the Iraq war and Washington’s threats to attack Iran. Without those two factors, $145 oil would have been $100 oil. A worldwide shortage of refinery capacity helped to drive up the cost of gasoline, fuel oil, and other energy products. It appears that rampant futures speculation in the energy markets also helped to spur oil prices. None of these factors was permanent.

Assessment: Given the condition of the American dollar, it might be better to denominate oil prices in euros—though this could be even more devastating for the American economy in the event of future episodes of instability. Aside from that, the long-term trend toward stable energy prices can only strengthen as the West reigns in consumption and alternative energy technologies become practical.

Implications: Barring an American invasion of Iran, oil prices of more than $100 per barrel cannot be sustained. New refineries in Saudi Arabia and other countries scheduled to come online by 2010 will ease the tight supply-demand balance for oil, and by then the Iraq war should be winding down. At that point, we can expect to see oil prices retreat gradually to around $65 per barrel. In response to high (by American standards) gas prices, the U.S. government probably will boost domestic oil production and refining to increase the reserve of gasoline and heating oil. This stockpile would be ready for immediate use in case of future price hikes. This will make it easier to negotiate with OPEC.

A key step in controlling oil prices, and an indicator of Washington’s seriousness about doing so, would be development by the government of at least four new refineries around the country, probably for lease to commercial producers. To avoid problems with neighbors, the refineries could be located on former military bases, which the government already owns. We rate the odds at no more than 50:50.

In the long run, the United States almost certainly will drill for oil in the Arctic National Wildlife Reserve, though efforts will be made to minimize environmental damage. For example, drilling will take place only in the winter, when the tundra is rock hard. This small new supply of oil will have negligible effect on oil prices.

By 2020, the new fields under the Gulf of Mexico will come online, putting even more pressure on oil prices.

Implications for hospitality and travel: Air carriers are facing difficult times as their largest single expense continues to climb. Many have added fuel surcharges to ticket prices, but rising prices eventually make it harder to fill seats. This puts an even greater premium on efficiency and cost-cutting. It also is likely to trigger more cooperation among competing airlines, with many sharing planes when passenger demand cannot fill separate flights.

Despite these and other efficiencies, we will not be surprised if fuel expenses alone ground one or two of the weakest carriers before the price of jet fuel stabilizes. For the rest, the worst should be over in another two or three years.

Like the airlines, cruise operators are being forced to adopt fuel surcharges to maintain their profit margins. This will not seriously affect luxury cruiselines, but if oil prices remain in triple digits it could begin to erode the family and economy cruise markets. Again, the crunch should pass relatively soon.

For the hotel sector, energy costs are an important expense, but far from the largest. So long as the price of oil does not go much higher, it should have only a modest effect on the bottom line. of hotels and other lodging facilities.

In the United States, some hotels may find that high gas prices inhibit drive-in traffic, particularly in family-oriented markets dependent on long-distance travel. This should be only a minor problem.

In Europe, oil shortages caused by temporary closure of Russian pipelines could cause periodic price spikes that inhibit travel for brief periods. We do not expect such problems to last any longer than it takes Moscow to make its political points. By 2015 or so, Europe will have developed other petroleum sources, making the unreliability of supplies from Russia much less troublesome.

While no one likes paying more for gas and electricity, high oil prices should have a relatively modest effect in the restaurant sector, where personnel costs trump all others. The greatest danger is that the price of gasoline will combine with other economic uncertainties to discourage dining out. If so, the pain should ease once the American economy begins to recover in late 2008.

At this point, consumers seem to be largely inured to the idea of paying more for their fuel than they once expected. Americans are cutting back temporarily while the U.S. economy is in decline, but travel will recover quickly once GDP growth returns to positive territory. Elective travel should be one of the most inelastic markets, declining rapidly when prices follow costs higher. In recent years, it has proved to be much more comfortable with rising costs than many observers might have imagined.

33. Growing competition from other energy sources also will help to limit the price of oil. Nuclear power is growing rapidly.

In Russia, plans call for construction of twenty-six more nuclear plants by 2030, when 25 percent or more of the nation’s electricity will be nuclear. China plans to build thirty reactors by 2020, quadrupling its number and bringing nuclear energy consumption from 16 billion kWh in 2000 to 142 billion kWh. Even the United States is weighing the construction of new reactors.

For transportation, ethanol is the most useful alternative to petroleum. Brazil already gets more than 40 percent of its fuel for cars from ethanol made from sugar cane.

Renewable sources such as wind and solar power also are growing rapidly, but they are unlikely ever to make up more than a small fraction of the world’s energy supply, save in areas where natural resources are plentiful. Iceland’s drive to develop geothermal power is one example.

Assessment: This trend will remain in effect for at least 30 years.

Implications: Though oil will remain the world’s most important energy resource for years to come, two or three decades forward it should be less of a choke point in the global economy. We should feed our stomachs before we feed our cars. Producing ethanol from switchgrass would cut the cost of corn by 20 percent, according to the Worldwatch Institute. This would significantly ease the global food crisis.

Solar, geothermal, wind, and wave energy will ease power problems where these resources are most readily available, though they will supply only a very small fraction of the world’s energy in the foreseeable future.

Declining reliance on oil eventually could help to reduce air and water pollution, at least in the developed world. By 2060, a costly but pollution-free hydrogen economy may at last become practical.

Fusion power remains a distant hope. Cold fusion also remains a long shot for practical power, but FI believes it can no longer be discounted. If the U.S. Navy’s reports of successful experiments can be corroborated, power plants based on the process could begin to come on line by 2030.

Implications for hospitality and travel: Save where there is an abundance of alternative energy resources, operators will continue to depend primarily on oil for their power. This will render them vulnerable to oil price shocks until a major alternative fuel source, such as fusion, becomes available.

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