Oil prices are expected to rise this week amid the escalating international confrontation with Libya and fears that the nuclear crisis in Japan will drive demand for oil higher.
The oil price hit $117 a barrel at one point on Friday, close to the $120-a-barrel price at which major airlines say they cannot operate profitably, and analysts said prices were likely to go higher in coming days.
A rising oil price amounts to a double whammy on travel – pushing up the cost of flights while reducing consumers’ ability to spend by driving up the prices of most other goods.
Airline association IATA warned an additional increase in the price of jet fuel is likely as a result of damage to refinery capacity in Japan. The country, scene of a colossal earthquake and tsunami 10 days ago, produces up to 4% of the world’s jet fuel.
IATA said the crisis in Japan would hit aviation hard as the country provides 10% of global airline revenue. It said rationing of fuel at Japanese airports may also become necessary as supplies are limited.
The association forecast the Chinese, South Korean and Taiwanese markets would be worst hit, but it also predicted an impact on traffic to the UK, the US, France and Germany.
Meanwhile, it emerged the United Nations has imposed a de facto oil embargo on Libya which has come under attack from coalition forces over the weekend after the UK passed a resolution to impose a no fly zone in the country.
The UN has not banned trading in Libya’s oil, but has frozen the assets of the country’s National Oil Corporation leading one analyst to say: “We have, in effect, an embargo.” A second analyst said it was “unlikely” Libyan oil would speedily return to the world market.