Essay, Micro: Rising Oil Prices and Euro Debt Crisis
Discuss the likely effects of rising oil prices and the European debt crisis on tourism and its related markets in Singapore. (25)
intro Rising oil prices and the Euro debt crisis will affect the demand and supply for provision of goods and services in tourism and related industries. In general rising oil prices will lead to higher costs of production in all industries while the debt crisis is likely lower demand for many travel related services.
In the air transportation industry, rising oil prices will lead to rising costs for airlines, as fuel is one of their biggest costs. This shifts the supply curve to the right significantly.
Demand for air transport can be analysed with regard to two kinds of consumers: leisure travellers and business travellers. The Euro debt crisis has led to a fall in national income of many european countries, which lowers their income and purchasing power.
This leads to a large fall in leisure/holiday demand from Europeans for flights to Singapore as leisure travel is a luxury good. Together with the fall in supply, this leads to a rise in price and a sharp fall in quantity of leisure travel, as shown in the graph here:
In the business air travel industry, demand tends to be price inelastic. Since business travel is a necessity, demand for it is income inelastic and only falls slightly. Due to price inelastic demand, prices rise more for business class travel compared to economy class travel for leisure, as shown here:
The overall effect of these factors will be a fall in total revenue for the airline industry. This is likely to lower profits for the industry.
The local hotel industry is likely to be negatively affected as well. The euro debt crisis will lead to fewer visitors to Singapore, and reduce their ability and willingness to spend on hotels.
For luxury hotels, the fall on demand is likely to be large as it is a luxury good, and demand from Europeans will fall more than proportionate to their decline in comes. There will be tourists who switch from luxury hotel to budget hotels and even hostels.
Rising oil prices will raise the costs of production of all hotels, as it raises their costs prices for electricity, food etc. This shifts the supply curve to the left.
For luxury hotels, the fall in demand is likely to be more significant than the fall in supply, leading to lower prices and quantity:
For budget hotels, demand may increase as tourists switch to them from luxury hotels. This will lead to a rise in price and quantity:
Singapore attracts many medical tourists to Singapore due to its robust and affordable healthcare system and hospitals. The demand for medical tourism from Europeans is unlikely to be affected by the fall in incomes as medical care is deemed as a necessity. Demand is also likely to be very price inelastic as there are no substitutes for quality healthcare.
Supply side analysis suggests that rising oil prices will increase the cost of production for hospitals. At the same time, the Euro debt crisis may cause the demand for medical equipment to fall, leading to cheaper medical equipment for the hospitals' purchase. Overall, the effect on supply is not clear.
Assuming that both demand and supply does not change significantly, the medical tourism industry is unlikely to be much affected by these two factors, and the industry as a whole is likely to become more profitable in the long run.
link to macro Rising oil prices will lead to an increase in the prices of our imports, which may lead to imported inflation and a general rise of costs. Singapore's central bankers should rely on an exchange rate policy of gradual appreciation in order to contain imported inflation.
The Singapore Tourism Board should also continue to diversify Singapore's sources of tourists so that in the long run Singapore's tourism industry will not be so susceptible to demand shocks from regional economic crises.