This NY Times article reports on Houston-based Continental Airlines‘ plan to respond to the recent spike in fuel prices that are straining profits of all airlines. Fuel is the second-biggest expense for airlines, after labor costs, and typically totals about 10% of operating costs.
Continental raised fares across the board late yesterday and said it will have to consider furloughs and wage cuts if jet-fuel prices do not decline from their current record levels. Continental raised ticket prices $10 each way for flights of as much as 1,000 miles, and $20 each way for longer trips. However, under heavy pressure from discount airlines, major carriers such as Continental have seen previous attempts to boost ticket prices fail when competitors decline to match. Even if this current increase sticks, Continental said it would offset only 15% of its higher fuel tab.
At current prices for oil, Continental faces an additional $700 million in annual operating expense over what it originally had planned for 2004. As a result, Continental CEO Gordon Bethune said he expects Continental to suffer a significant loss for 2004.

During a political season, you will not hear much about the benefits of higher oil prices. But this Wall Street Journal’s ($) Holman W. Jenkins, Jr. Business World column dissects the issue and concludes that increased oil prices are not all bad. First, Mr. Jenkins addresses the current price spike and the reasons behind it:

The futures market puts oil for delivery next summer at $35, well under today’s $41. Seers are not hard pressed to explain why. On April 24, three small boats operated by suicide commandos hit Iraq’s southern oil terminal and a few days later kamikaze gunmen shot up a Saudi petrochemical plant. Osama bin Laden has a plan: Get control of Saudi Arabia through subversion and put himself in charge of its oil, foundation of a new Islamic empire. That is, Saudi survival can’t be taken for granted.
Traders say five to ten bucks of today’s price is due to terrorism fears. Notice also that the biggest speculator out there is the U.S. government, which has been frantically topping off the Strategic Petroleum Reserve ever since November 2001, yelps from private energy buyers notwithstanding.

Then, Mr. Jenkins focuses on the real issue, which is not a shortage of oil:

Note that the issue is not whether the world is running out of oil. The debate concerns a theoretical milestone called Hubbert’s peak, after which output from any given field slows and becomes more costly to produce long before the last drop is lifted. Half of Saudi Arabia’s oil comes from the giant and venerable Ghawar field; much of the remainder comes from four other aging giants that may be at or near their Hubbert’s peak. . .
How much oil is left is far less significant than how quickly and cheaply it can be extracted, especially from a relative handful of large, cheap-to-produce fields that have carried industrial man for a century. Some believe that getting much above today’s 80 million barrels a day would be horrendously costly if not impossible. If they’re correct, two billion Chinese and Indians, right now beginning to trade their bicycles for Toyotas, would be stuck trying to achieve modernity by outbidding the rest of us for a share of the world’s current rate of oil production rather than benefiting from additional output.
All this has some petroleum engineers predicting resource wars, famine and pestilence, preventable only by a massive effort of central planning to shift the world to a less hydrocarbon-intensive lifestyle. If so, we might as well pass around the cyanide caplets right now. Such global planning is certainly beyond the wisdom and power of politicians to manage.

Which brings Mr. Jenkins to his central theme — i.e., the benefits of higher oil prices:

Yet the unwillingness of doomsayers to credit price signals with eliciting changed consumption behavior, new technology, a thousand substitutions and other adaptive responses is more than a little peculiar here. Oil companies have held back from investing in deep-water searches, Canadian oil sands and Venezuelan bitumen for fear oil prices will plummet to $15. Shareholders have kept Big Oil on a short leash, tolerating only low-risk investment projects that will generate cash flow in a small number of years. Won’t this change now if higher prices seem a permanent feature of the landscape?
Motorists might or might not be willing to swallow price hikes, but what about other industries that use petroleum as feedstock? They’re price sensitive and would be expected to adapt in ways that aren’t all easy to foresee from today’s vantage.
Scare talk is a hardy perennial in the global petroleum business, a passport to fun and attention from the media. Industrial society is frequently painted as a fragile, vulnerable machine, yet all the evidence suggests the opposite: It’s a machine that has grown more resilient and adaptable the more complex and interdependent the world becomes. In short, as long as the price mechanism is allowed to work, mankind seems likely to muddle through. Hallelujah, then, for higher oil prices.

Amen.
On a related note, although not quite as insightful as Mr. Jenkins’ piece, this NY Times editorial strikes the correct theme that short term spikes in energy prices is not a cause for overreaction.