Oil Price Declines in the Ash of an Icelandic Volcano

This Icelandic volcano is not just a quaint story about some faraway place.

The most immediate, and most public, effect of the Icelandic volcano is that transatlantic flight has reverted to the pre-Charles Lindbergh days. Basically, there is no more flying to and from Europe across the North Atlantic. And so, the airline industry is losing about $200 million in revenues per day, while stranding millions of passengers.

According to Eurocontrol, which operates the airspace in Europe, about 20,000 flights per day are canceled. By my back-of-the envelope calculation, that translates into about 1.5 million barrels of jet fuel per day that’s not being burned to power airliners. That’s just shy of 2% of total daily world oil demand. So with this fast hit to demand, it’s no wonder that the price of oil has dropped about $4 per barrel in the past week…

Meanwhile, world trade is suffering. Perishable items, from flowers to exotic fish and fruits, are rotting on the loading docks… Chinese auto assembly lines are slowing down due to lack of electronic components from Germany. There are reports of mass layoffs in nations as far apart as Kenya and Colombia, due to the inability to export goods via airfreight to Europe. Then consider all the personal and business disruptions and expenses from casual and business travelers unable to fly.

Can the world economy take this hit? And it’s going to continue for how long? Nobody knows. Or put another way, do YOU want to be on the first airliner to fly through an ash cloud?

Byron King
for The Daily Reckoning