externalities—those factors that would make a hotel property, for example, espe- cially valuable, say, as a “trophy” to a specific buyer. Prestige, potential for political or moral influence, and access to certain markets are all externalities that ordinarily affect transaction prices.
1.7.3 Options
For assets that have option-like characteristics or that are not traded frequently, neither the discounted cash flow nor the price and ratio comparison approaches can be readily applied. Instead, option-pricing models (e.g., the Black-Scholes model) that use contingent claim valuation estimates (of assets that pay off only under certain contingencies) are usually employed.
This approach, however, is not used in travel industry practice unless the asset to be valued is an option contract (e.g., a warrant, call, or put) or is a contract for marketing or distribution rights or for some form of intellectual property right (e.g., a patent). Some other variations on these valuation concepts are discussed in AppendixB.
exhaustion.40Given that world annual consumption as of 2016 is at a rate of around 35 billion barrels a year and rising, an estimate that perhaps only 1,500 billion barrels of proven and probable global reserves remain to be recovered suggests that—at current rates of consumption and of new-field discovery—world supplies might not last more than another 40 years!
If so, and in the absence of further large discoveries and/or of technological substitutes, the price in real terms can only rise substantially. Under such condi- tions, people will be forced inevitably to re-allocate their budget priorities—
spending more for energy (e.g., heating and air-conditioning as well as for driving and flying) and less on other items.41Although rising prices ($147 a barrel at the peak in 2008) appear to have signaled that world production is already becoming insufficient to match the new demands spurred by rapidly modernizing nations such as India, China, and Brazil, such a pessimistic view is still controversial and not totally convincing in view of the steep drop to under $45 a barrel in 2015.42
Implementation of modern oil shale and natural gas extraction technologies (including horizontal drilling and “fracking”) suggest that the US will likely become largely energy-independent. And alternatives to petroleum will be
40A possible peak in production was first noted by M. King Hubbert, a Shell Oil geologist who predicted in 1956 that production in the contiguous United States would peak in the 1970s. Peak oil is discussed in Simmons (2005) and Hubbert’s Peak in Campbell (2004), Goodstein (2004), Deffeyes (2003, 2005), Maxwell (2004). Gold and Davis (2007) suggested that the peak global production ceiling is probably around 100 million barrels a day. A downgrade of supply pro- jections by the International Energy Agency appears in King and Fritsch (2008). Potential shortfalls in Saudi production are also discussed in Maass (2005) and King (2008).
Corsi and Smith (2005) and Mills (2008) strongly disagree with this “peak-oil” thesis. Corsi and Smith convincingly show that hydrocarbon materials are continually seeping upward from deep below the earth’s surface, and that oil and gas are abiotic—i.e., do not require decay of dinosaurs or plants or photosynthesis—and also arerenewable. Mann (2013) discusses fracking and methane hydrate and the possibility that reserve supplies are still ample. Woody (2013) writes about the development of jatropha plants that produce high-quality oil that can be refined into low-carbon jet fuel or diesel fuel. And Epstein (2014) makes the moral caseforuse of fossil fuels.
41In the United States, which absorbs around 20 % of world production (with China around 21 % in 2016), approximately two-thirds of consumption goes to fuel cars, trucks, and planes. As economic development of China and India and Brazil proceeds, the demand for fuel in those populous countries will likely be of similar proportion. Appenzeller (2004) notes since 1970, the total miles traveled annually by cars and trucks in the United States has doubled and thus far outstripped population growth. Schwartz (2008) briefly reviews the history of how the United States came to be so dependent on oil. See also Graham and Glaister (2002) and Steiner (2009).
42Huber and Mills, for example, argue that, as of 2005, the global average cost of lifting a barrel is under $15 ($5 in the Middle East and about $15 to melt it out of Alberta sands). Also, reserves are at least 3.5 trillion barrels, at three times conventional estimates and enough to last another one hundred years. Ball (2004), Huber and Mills (2005), Radetzki (2010), Luskin and Warren (2015), and Aguilera and Radetzki (2016) are optimistic about the availability of oil resources. See also
“The Oil Sands of Alberta,”60 Minutes, CBS News, January 22, 2006, “Energy’s Future beyond Carbon,” Scientific American, September 2006, Saleri (2008), and Strauss (2011). Increasing energy efficiency is another mitigating factor given that real US economic output, using about the same amount of crude, is 25 % higher in 2011 than it had been a dozen years prior.
1.8 Oil 41
ultimately developed and already include tar-sand, hydrogen, algae cultivation, and solar power sources. Meanwhile, new petroleum and gas reserves continue to be found in many places outside of the Middle East.43
The challenge for travel-related industries, though, is to survive and prosper through often difficult periods of highly volatile energy prices and government policies.44 Even with ample reserves, adverse climate changes (i.e., global warming) might make it politically impossible to substantially extract all of them and to also escape imposition of so-called “carbon-taxes.” Given that travel-related industries all require substantial energy inputs for operations, such taxes have the potential to significantly impair the investment characteristics of travel companies.
World oil production and consumption rates and the inflation-adjusted annual average prices per barrel are illustrated in Figs.1.24. Production and consumption rates for the United States appear in Fig.1.25.
- 25 50 75 100
7 14 21 28 35
60 70 80 90 0 10
Billions bbl/year
World Consumption
$ price
real price/bbl
Fig. 1.24 World crude oil production (thin line) and consumption (thick line), 1960–2014.Sources:
International Energy Annual, EIA.gov
43See also Strahan (2007), McKillop (2005), and Broad (2010) about the formation of oil. The possibilities of an alternative hydrogen-based economy are discussed in Rifkin (2002). Fallows (2012) writes that the entire world’s aviation-fuel needs could be met by algae facilities with the potential to produce 5–10 times more fuel per acre than do other biofuel sources. See also Muller (2012, p. 282) and Helman (2013). The question remains as to whether it requires more energy to produce this algae oil than that contained in the oil itself.
44See also Tertzakian (2006), Bryce (2008), and Hicks and Nelder (2008); “The Future of Energy”
inThe Economist, June 21, 2008; and Helman (2009). A broad overview appears in El-Gamal and Jaffe (2010). The pessimistic view, which incorporates accounting for costs of ecological damage, is presented in Hallett and Wright (2011). A more optimistic view is presented in Corsi and Smith (2005), Huber and Mills (2005), Reed (2010), Yergin (2011), and Lynch (2015). Yergin’sThe Prizeprovides a detailed history. Button (2013) writes about transport and energy.