Dr Ian Yeoman, Futurologist
With oil prices heading towards US $150 a barrel (July 2008) and will probably reach $200 by the end of the year, demand for air travel is faltering as consumer spending is squeezed and stagflation sets in, all reminiscent of the 1974 oil shock when oil prices rose from $2 to $8 overnight. Combined with falling house prices, tension in the Middle East, food inflation and increased demand for consumerism in China, the world is on a course of meltdown (some would say) or is this just another recession. So, what are the prospects for world tourism to 2030? Dr. Ian Yeoman, Victoria University's resident travel and tourism futurologist explains.
The strong growth in world tourism over the last decade correlates to economic well being. When economies grow, personal income rises which results in the discretionary income being spent on tourism. According to the UN World Tourism Organisation, the growth in international arrivals significantly outpaces economic output. In the recent years when world economic growth has exceeded 4% per annum, the growth of tourism volume tends to be higher at 6.5% per annum. At the same time world economics have always been doom and burst, therefore the present situation is nothing new.
With West Texas Intermediate Crude Oil hovering at $150 a barrel, the tourism industry is seeing a series of energy surcharges being added to the price of air tickets and business complaining that oil is driving up costs. In 1956, the Shell Oil geologist, M King Hubbert, predicted that US oil production (barrels pumped per year) would peak in the early 1970's. Most geologists at the time rejected Hubbert's analysis, until 1970 when oil production peaked within the lower US 48 states. Since then, numerous respected geologists have refined Hubbert's methodology and applied it to worldwide oil production, country by country. They concluded that world production of oil will peak between 2004 and 2008 (today's time zone). Most geologists estimate that 2 trillion barrels of oil were formed in the earth over millions of years. To date we have pumped out half of this supply. British Petroleum (BP) predicts there are forty years left of oil supplies. But the implications of this forecast are not straightforward. As world demand grows and supply diminishes, prices will soar. Some 30 years ago, we had a taste of what can happen with soaring oil prices. But then there was plenty of oil. In the Autumn of 1973, the Organization of Petroleum Exporting countries (OPEC) imposed oil restrictions and increased the price by 70% to $7 a barrel. Protesting US support of the Yom Kippur War, OPEC raised the price again to $7 per barrel in 1974 (a 130% increase within 12 months). With the overthrow of Shah of Iran and the Iran-Iraq war, oil prices escalated to $40 per barrel in 1981. This is the equivalent to $70 per barrel in current dollars. The effect of this rise meant that drivers all over the world had to adhere to a reduced speed limit on roads. There were restrictions on heating systems and the use of electricity for outdoor displays and advertising. In the USA, long queues appeared at gasoline stations, something that was unheard of in those days. The oil crisis led to a recession in 1975, the first of four world-wide economic downturns that were triggered by oil prices and Middle Eastern events. Over the next five years, governments developed non-OPEC sources of oil, expanded nuclear power installations and implemented intensive conservation measures.
The impact of rising prices in 1974 on international tourism according to the UN World Tourism Organisation was:
1st year (1975): Continued growth in international tourism
The first year following the oil shock of 1974, the impact on tourism was not generally perceptible. International tourism demand continued to grow rapidly, at a rate of 8.1%, from 1974 to 1975. This growth was even stronger than that recorded in previous years (3.4% in 1974 and 5.2% in 1973).
2nd year (1976): Slowdown in tourist flows
By the second year, adjustment policies introduced in late 1975 had led to a decline in purchasing power in many oil importing countries, which in 1976 triggered a steep slowdown in tourism demand, with growth of only 2.3% worldwide, 1.5% in Europe and -4.9% in Africa.
3rd year (1977): Strong recovery in tourism activity
During the third year, 1977, tourism growth resumed its earlier pace and even regained some lost ground, with a rate of 8.2%.
As a result, world economic growth (GDP) in 1975 fell to 1.9%, and then subsequently rose to 5.1% in 1976 and 4.4% in 1977. Therefore, the impact of the oil shock in 1974 was only limited to one year, with recovery across all markets in subsequent years.
The oil shock of 1979 was a result of the Iranian revolution; this crisis came at a time when the world was still recovering from the first crisis in 1974, so the second impact was more adverse. The effect of the crisis was a slowdown in economic growth and disposable income across most western economies.
1st year (1980): Continued growth in tourism activity
During the first year following the oil shock of 1979, international tourism demand continued to increase at a sustained pace, with 2% growth in world tourism in 1980.
2nd, 3rd, 4th years (1981, 1982, 1983): Stagnation in tourism flows
By the second year, 1981/80, tourism demand had stagnated, with barely positive growth of 0.2%. As distinguished from the first oil shock, this stagnation was to last three years and even to become slightly recessionary in 1982, with negative growth of -0.5%, followed by a rate of only 1.8% in 1983. This stagnation or recession had its primary impact in the world's two largest tourism receiving regions: Europe and the Americas. The Americas, and the United States in particular, also suffered the repercussions of a sharply rising dollar during this period, contributing to a decline of unrivalled proportions (-4.5%) in tourist arrivals to the Americas in 1982.
5th year (1984): Strong recovery in international tourism
It was not until the fifth year following the second oil shock of 1979 that earlier rates of growth in international tourism demand were recovered. As during the first oil shock, growth rates in world tourism even caught up to their earlier pace, with positive growth of 8.8% in 1984, and continuing sustained growth of 4.3% in 1985 and 3.2% in 1986.
As a consequence, the second oil shock of 1979 resulted in Europe entering a prolonged period of stagflation, with international arrivals falling by 2.2% in 1980. Europe did not recover until 1984. In the Americas, the high exchange rate for the US $ had lasting effects, prolonging recession for international demand to the region at a time when growth was returning to the rest of the world. In 1985, when the US $ peaked, tourist arrivals to the Americas declined by 3.4%.
The impact of the second oil shock on international tourism was therefore greater than the first, as between 1980 and 1983, growth in the international arrivals was limited with an increase of only 1.4%.
But it is not all doom and gloom. There are good reasons to believe that the economic consequences of a jump in oil prices will be less severe now than they were in the 1970s and early 1980s. Energy conservation is stronger than in the 1970s, due to government taxation policies. Additionally, a shift to other fuels and a decline in heavy industries has made rich economies much less dependent on oil than they used to be. Since the early 1970s, the amount of oil consumed per real dollar has fallen by almost half in rich countries. In addition, high oil prices encourage innovation and conservation. This means the development of better aircraft that are more fuel efficient and the use of alternative energy sources. The problem is, transport is an oil based system combined with the factors that demand is increasing and refinery capacity is constrained. The world didn't come to an end when we moved from a wood to a coal economy or from a coal to an oil economy. Today, we are in a transformation process from oil to a hydrogen economy... therefore it is going to hurt.
Forecasting, by its very nature, is a hazardous exercise. Projecting future international tourism flows has become more difficult over time because, on the one hand, events such as 9/11 caused a temporary disruption but on the other hand, climate change causes more permanent change to tourist flows. Therefore, two scenarios have been prepared based upon different economic growth rates, oil prices, climate change, transport flows and personal disposal incomes. The scenarios are called Best Case and Middle Class Squeeze.
Over the next two decades, international arrivals will grow by 3.4% per annum and receipts by 4.4%, based upon oil prices averaging $80-$90 a barrel, new energy innovations, world GDP rising by 129% by 2030 but falling levels of disposal incomes amongst an aging population most significantly between 2015 – 2030. In these economic circumstances, Europe will remain the worlds dominant region. However, a shift will take place, with Europe losing market share to Asia and the Middle East by 2030. Europe's share of international arrivals will fall from 54.6% to 41.1%, whereas the Asia and Pacific region will enjoy a rise in market share of 19.3% to 28.8%, with a similar increase in receipts. The Americas' market share will remain stable and Africa will experience a significant growth but from a small base. The changes in market share reflect different growth rates for different regions. Europe will grow at 2.3% per annum, whereas Asia will grow at 5%. From an analysis of expenditure, it seems that receipts in the Middle East will rise from US $26.3 billion to US $149.7 billion, a staggering growth rate of 7% per annum, capturing 7.4% of all tourism expenditure. Africa will follow a similar pattern, with receipts rising from US $21 billion in 2005 to US $98 billion by 2030, a growth rate of 6% per annum. Growth in world tourism will be slower than the decades prior to 2005 as a result of shrinking and ageing populations therefore, the average growth rate will be 3.4% to 2030, compared to the historic average of 6.5%. By 2030, more than US $5 billion will be spent by international tourists every day across the world, from US $2 billion in Europe to US $1.5 billion in Asia. By 2030, international arrivals will reach 1.9 billion international arrivals, spending US $2 trillion.
Source: Tomorrow's Tourist 2008
The middle classes of the world are facing rising prices and less monies for out of home expenditure, all shaped by the economic disease of stagflation where inflation is higher than GDP growth. In this scenario, oil production peaks in 2009 with prices averaging over $200 a barrel over the next decade in real terms but then falling as demand falters. In this scenario, the world hasn't been able to adjust to the transformation between oil and hydrogen economy until 2020, and in the meantime transport and travel has become more expensive. The scenario presumes mass belief in the plenitude of available oil reserves, limited intervention of supply and failure to respond quickly enough to alter demand, triggers a sudden and prolonged period of economic shocks, political instability and environmental disasters. The low priced oil economy has ended. This difficult transformation squeezes economic growth amongst the middle classes of the world and leads to economic demise. In this scenario, a growth rate of 1.4% per annum is assumed representing 1.1 billion international arrivals and $979bn in receipts. The short term impact of this scenario sees the end of low cost carriers- in many destinations and long haul travel becomes more characterised by travel for the rich, exclusive and necessary. Intercontinental travel subsequently slows down, whereas interregional travel is supplemented by alternative public transport systems. In this scenario city based tourism with good connectivity fares better than rural destinations where connectivity is poor. In the Middle Class Squeeze scenario, Europe market share falls from 54.6% to 49.8% but the Asia and Pacific region don't see the rapid rises as seen in the Best Case scenario due to slowdown in economic development. In fact Europe's compactness, an increase in inter regional travel, along with a slowdown in outbound travel to other world regions buffer tourism in Europe.
One can never forecast an exact future, the role of scenarios is to ask what if questions. It is now certain that the world is entering a phase of stagflation fuelled by high oil prices, but the key uncertainty is how long it will last. As we can see from this analysis, the world has been here before, but the length of the stagnation could be 1, 2, 5 or 10 years, who knows? The two scenarios, Best Case and Middle Class Squeeze represent different growth rates under different economic conditions, the difference being nearly 900 million holidays. So, can the world meet the challenges of the 'end of oil' and massive impact on world tourism, economic development, prosperity – if not, we will see significant increases in poverty and war. So, what do you think?
I would like to acknowledge Chris Greenwood for his help with the scenarios and forecasts and the UN World Tourism Organisation for access to their research library.
Dr. Ian Yeoman
Ian Yeoman is the world's only professional crystal ball gazer or futurologist specializing in travel and tourism. Ian learned his trade as the scenario planner for VisitScotland, where he established the process of futures thinking within the organisation using a variety of techniques including economic modelling, trends analysis and scenario construction. In May 2008, Ian was appointed an Assoc. Professor of Tourism Management at Victoria University, he is a popular speaker at conferences and was described by the UK Sunday Times as the country's leading contemporary futurologist.
Ian has a PhD in Management Science from Napier University, Edinburgh and a BSc (Hons) in Catering Systems from Sheffield Hallam University. Previously, Ian was Senior Lecturer in Tourism and Hospitality Management at Napier University and University College, Birmingham. He has extensive experience within the hospitality industry, for which he was a hotel manager with Trusthouse Forte.
Ian has received a number of awards in recognition of his research including his appointment as a Honorary Professor of Tourism Management at Stirling University and the Mike Simpson Award from the Operational Research Society.
More details about Ian and futurology in the travel industry can be found at www.tomorrowstourist.com
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