Thursday, April 17, 2008


You have to dig deep to see the progress coming out of the Middle East. In Iraq, a tentative deal for sharing the oil wealth has once again been reached. Passage appears to be a cinch this time.

Thirty-one oil companies are bidding on the rights to develop Iraqi oil fields. Since much infrastructure is in place, the development could be quick, a doubling of production in a couple of years or so.

Over in Iran, there has been a significant move toward the bargaining table. The Iranians are willing to sit at the same table with the Americans. It has always been interesting to see the dance involved in getting to the bargaining table. Some thirty years ago, it was the shape of the table that took months to negotiate. Of course, a lot of times the behind the scenes negotiating becomes very intense when the time to do the face to face, public, show meeting grows near; no need to put on the show unless you already have a deal.

China is the latest to "sweeten" the pot for Iran. China would like to buy oil and Iran would like to sell China oil, all will benefit by getting the terrorism and nuclear stuff out of the way.


The price of oil is driving up the travel cost per mile. Even a car that gets 20 miles to the gallon consumes 17 cents worth of fuel per mile at $3.40 per gallon. Of course, the 17 cents in no where near the "all in" price. The average total cost per mile is better than 50 cents now. Hybrid vehicles typically cost more than $2.30 per mile after figuring the high cost of purchase and battery replacement. The common belief that hybrids are "the solution" is only partially correct and only in the very long term.

O how great can the cost advantage of the bus and airplane get before the next man chooses to use that mode of transportation? In the last year or so, the cost per mile of a seat on a CAL plane has risen dramatically, from about 11 cents per mile to almost 12 cents! This 9% increase is substantial until compared to the cost of most other transportation cost increases (obviously buses and trains are enjoying the same relatively "progress" against their competitors).

The fact is that less than a year ago, it cost about the same to fly a mile as it did to buy gas for a mile. Today, it cost about 50% less to fly a mile. In many vehicles, those that get less than 15 miles to the gallon, it is now less expensive for two to fly than to drive together, even if the second passenger pays the same fare as the first! The travel cost advantage continues to swing to the airline (bus and train).


As long as oil prices are increasing, airfares, bus fares and train tickets will lag behind. They will go up but they will not catch up until the increases are over. When the price of fuel finally does fall, the price declines in the ticket prices will once again lag behind. The time of peak profits for the planes and trains and buses will be the time when ticket prices are high but the fuel costs are falling. The public will be buyers of airline stocks at this time as they will see the big profits without understanding that the source of the big profits is finally traveling the wrong direction. Buy now, sell when the others see the huge profits and are willing to pay you 20 times these excessive profits!