Monday, April 19, 2010

Volcano Influences Oil Prices

World oil prices have been between 2 and 3 percent lower this morning because of the possibility that the volcanic eruption in Iceland could lead to fewer airplane flights for some time to come.

Civilian aircraft use a small fraction of total world oil production, but it takes only a small change in oil demand to create a noticeable change in prices. That tends to be the case in any product for which the supply is hard to change on short notice.

Airplane flights have had to be canceled across half of Europe since the eruption because of the volcanic ash cloud, which can clog an airplane’s engines, eventually leading them to shut down.

European airlines have begun lobbying for a lifting of the restrictions, based on about 30 test flights that they have done, all successful, but that change in policy is unlikely to come until conditions change. Supposing that the volcanic ash causes only 0.1 percent of flights to crash, that is still, from a public policy point of view, too costly as a mode of transportation.