Kiplinger Connection
Energy • Air Travel • Small Business

Energy: Falling demand will mean falling prices.
Air Travel: Carriers in a tailspin.
Small Business: Mounting pressure to fix set-aside program.

Energy
Beyond this week’s oil gyrations ...
The longer trend will be gradually down as the commodities bubble slowly deflates.

Volatility will remain high. Still ...
Look for oil prices to fall about 30%,to around $100/barrel, by the end of the year.
And look for gasoline at $3.45 a gallon by Dec., down 14% from this month’s high.

Why? Demand is falling, the same way it did in 1979 and 1980, when pain at the pump slashed gas use by 5% and 6%, respectively.
Miles traveled in the U.S. are down ... off 4.3% in March alone. In the last week of May ... with the holiday weekend ... gas buying slid 3.9% from the same week a year ago.
Consumer habits are changing. The biggest switch is toward smaller cars and away from large SUVs and pickup trucks. Four-cylinder engines made up 45% of May sales, up from 30% in 2005. Energy is also a factor when it comes to purchases of home appliances.
The U.S. won't travel this path alone. When government subsidies in many Asian nations disappear by year’s end, demand will slacken. China, stockpiling supplies for the coming Olympics, will likely shift gears and cut back on its energy purchases by August.

Half of the price drop will come from speculative froth subsiding.
The rush of money into commodity investments has slowed markedly. Big bets on oil will ebb amid U.S. regulatory probes and plunging demand.
A strengthening dollar will help. Its moves will be volatile, too, but the buck’s gradual recovery will lessen the need for oil producers to keep prices high on crude, their primary greenback-denominated export.

Modest production growth, mostly from Russia, is a positive, too.
The upshot: A better supply and demand dynamic ... from a deficit of 900,000 barrels a day that had to be made up by dipping into reserves to a global cushion in production capacity of 600,000 barrels a day.
Still, there'll be no long-term, lasting collapse in prices ...the kind of decades-long trough that followed spikes in 1979 and 1980.Supplies just can't be increased as much or as quickly as they were then. And wringing out major energy inefficiencies is a lot tougher today. There was plenty of low-hanging fruit to pick the last time around.
But pricking the commodities bubble will sure feel good. It'll reduce inflationary pressures, give consumers and businesses a break, and encourage spending and investing ... just what the economy needs.

Air travel
U.S. airlines ... and many travelers ... are planning big cutbacks to cope with soaring fuel costs. Carriers are in a tailspin ... on track to lose $7 billion this year, after a $4-billion profit in 2007. Eight U.S. airlines have gone out of business in less than a year, and the rest are on major cost cutting sprees to try to stay aloft.
A 20% reduction in domestic capacity is a good bet after summer, the busiest travel period. Carriers will ground older and smaller planes, which use more fuel per passenger mile, and lay off air and ground crews.
Over 9,000 jobs have been cut already, with thousands more to go soon.

Smaller airports will lose service or host fewer nonstop flights. More trips will involve changing planes at hubs, which is more efficient for the airlines but not for business travelers and vacationers.
Fares will climb 20% ... more at airports where competition falls as a result of the cutbacks. Plus even fewer perks ... no more free peanuts or soft drinks, for example ... and still more add-on fees for services.
Small communities are already suffering, with fewer flights or no service to Wilmington, Del.; Grand Canyon and Peach Springs, Ariz.; Lancaster, Pa.; Hagerstown, Md.; and Port Angeles and Oak Harbor, Wash.
Facing big cuts this fall: Omaha, Neb.; Bakersfield, Calif.; Columbia, Mo.; Tulsa and Oklahoma City, Okla.; and Little Rock, Ark.
Some of the areas getting hit will feel a ripple effect. Businesses aren’t likely to move away, but those looking for a new site may conclude that they’re better off relocating closer to a big airport.

Poor service is taking a toll on air travel and related sectors. In the past 12 months, about 41 million airline trips were avoided, according to a survey by the respected Peter D. Hart Research Associates for the Travel Industry Assn. Twelve million would have been for business and 29 million for leisure. The combined cost to the U.S. economy, including air carriers, hotels, and restaurants, is put at $26.5 billion.
Congress may help out some. There’s talk of a tax holiday ... temporarily suspending either the federal fuel or ticket tax to help airlines cope ... or raising subsidies for service to small towns.
But it won’t be enough to get airlines to back off their plans.
And the chance of more bankruptcies remains high. US Airways and AirTran are struggling with low credit ratings that limit liquidity.
The bottom line for air travelers: Higher fares, packed planes, limited flight selection, and more inconvenience if flights are canceled.
There is one bright spot: With fewer planes, skies and runways will be less congested, and there’ll be fewer delays on flights.

Small business
Pressure to fix the small business set-aside program is mounting. Half the federal contracts that were designated for smalls in 2005 and 2006, about $100 billion a year, actually went to big firms, including multinational corporations. That’s according to documents finally released by the Small Business Administration under court order.

Stricter controls are likely next year. Certification procedures have already been adjusted once by the SBA to cut down on abuses, but Congress and small business groups want the agency to do a lot more.