June 7, 2011, Atlanta, GA. – Based on a recent analysis conducted by PKF Hospitality Research (PKF-HR), the U.S. lodging industry will see minimal disruption if oil prices reach $125 per barrel price in 2011. However, if prices surge to $150 a barrel, the recovery that U.S. hotels are currently enjoying could be severely curtailed.
The results of the analysis have been published in a special report entitled Oil Prices and Lodging Risk. John B. (Jack) Corgel, the Robert C. Baker Professor of Real Estate at the Cornell University School of Hotel Administration and senior advisor to PKF-HR, and Jamie Lane, Research Associate, are the authors of the report.
“As the price of oil has shot up, and then down, over the past few months, many U.S. hoteliers have worried about the impact that oil prices could have on their business,” said R. Mark Woodworth, president of PKF-HR. ”Our analysis found that when oil prices increase beyond normal levels, individual consumer and business spending power is reduced, which in turn has a negative multiplier effect throughout the economy in general and the lodging industry specifically. Based on our study, oil prices above $125 a barrel exceed ‘normal’ levels and would have an increasingly negative effect on hotel operating performance.”
The PKF-HR Hotel Horizons® econometric forecasting model relies on economic data from Moody’s Analytics (Moody’s) to project future hotel demand levels. In April of 2011 Moody’s Analytics created two “oil spike” economic forecasts around a hypothetical future where prices increase to either a high of $125 or $150 a barrel by the fourth quarter 2011. PKF-HR used these hypothetical economic scenarios to forecast RevPAR for the U.S. lodging industry through 2013.
For comparison purposes, the March 2011 Hotel Horizons® forecast served as the baseline lodging forecast for the analysis. This baseline forecast reflects Moody’s modeled fundamental price of oil ($93.53) coupled with a premium of around $5.00 to account for the supply uncertainty created by ongoing unrest in the Middle East.
“The U.S. economy is highly dependent on a steady supply of affordable oil, and in turn, so is the lodging industry,” said Corgel. “Therefore, it is vital to understand the impact of high oil prices on the overall economy.” According to Moody Analytics, the U.S. economy could weather a rise in oil prices to $125 per barrel, but a surge to $150 would trigger a mild recession. In the $150 per barrel scenario, Moody’s forecast of real GDP growth falls by a maximum of 2.6 percentage points to an annualized low of 1.5 percent in 2012.
When applying the two alternative economic forecast scenarios to the Hotel Horizons® forecasting model we see oil’s dampening effect on RevPAR growth. The RevPAR gains observed in the beginning of 2011 will not continue if oil prices move as scripted in both Moody’s oil spike scenarios.
In the March 2011 Hotel Horizons® baseline forecast, U.S. hotel RevPAR is projected to increase a combined 16.3 percent over the course of 2011 and 2012. “When we applied the economics of the two alternative economic scenarios to our forecast model we saw modest changes in RevPAR growth in 2011, but fairly significant differences in 2012,” said Lane. “Over the two year period (2011 and 2012), RevPAR would increase just 10.1 percent if oil prices reach the $125. However, if oil prices were to surge to $150 a barrel, RevPAR growth would be limited to a very modest 6.9 percent.”
Looking specifically at location segments, PKF-HR then tested which ones are more susceptible to an increase in oil prices. “Since many hotels are travel destinations, one logically can assume that increases in the price of getting to the destination may decrease the demand,” noted Corgel.
“Not surprisingly we anticipate that hotels with ‘drive-to’ business will see the first impacts of increased oil prices; this includes interstate, suburban hotels, and resort locations near major metropolitan areas. We then expect declines to migrate to ‘fly-to’ resort locations once other hedging strategies, i.e. taking the train, reducing other vacation expenditures, etc. are exhausted,” Lane said.
“Moody’s highlights the low probability of these oil spike scenarios. We believe that oil prices could have a profound impact on future revenue should those prices either get ahead of the economy from speculation or if political unrest accelerates. For these reasons, the price of oil should be on everyone’s radar when planning for the future,” concluded Corgel.
To download a complimentary copy of the Oil Prices and Lodging Risk report, please visit www.pkfc.com/oilpricesandlodgingrisk.