As oil prices go up, will hotel performance go down?

But the report also says there is thin evidence to come to any strong conclusions, especially when oil price becomes the breaking point. It quotes a Morgan Stanley report that says, “The price at which demand destruction kicks in can be fiendishly difficult to estimate.”

While the price of oil has ebbed and flowed in 2023, it has continued to climb this summer. The U.S. West Texas Intermediate hit the $95 per barrel mark on September 27, the highest since August 2022.

But economists have been saying this year that even if there is a recession, the travel sector will not suffer as it has in previous economic cycles. So the key question is: would high oil prices fail to diminish hotel performance over the coming year?

Greg Mount, president and CEO of Denver-based Victory Hotel Partners, said he understands the perception that things like leisure travel have traditionally given way to necessity when oil prices spike.

But he said he’s more optimistic that it wouldn’t have the same impact as in previous economic cycles.

Greg Mount

“I do think that there’s been more diversification in local economies; there have been changes specifically in some of the more energy-related cities (Denver, Houston, Calgary). So, it’d be a little less volatile,” Mount said. “But I don’t think there’s any question that there’s going to be segments of our business that are more sensitized to these energy spikes, particularly the economy and the select-service [hotel segments] will be more impacted than others.”

Mount said most of his company’s hotels aren’t in major metro areas where a decrease in business travel could be more easily seen. And the majority of them are in the independent boutique space. He said hotels must help customers feel better about their overall costs if oil prices and inflation continue to be factors.

“It’s incumbent upon us to focus on creating packaging and incentives that help overcome that cost, whether it’s something as simple as including breakfast, or things that are maybe targeted to their families that enhance their stay, and allow them to feel that it’s affordable to come in and make that trip,” Mount said.

And if oil prices continue to climb, Mount said there could be trade-offs for business travel markets and opportunities that aren't necessarily negative.

“We have probably more of that business/leisure traveler coming in and going to work from the hotel, but at the same time, they will go and do something with the family,” Mount said. “So as oil prices go up, there’s also a correlation to the positive impact to other corporate segments, which will also drive business. So, it’s a bit of a double-edged sword, depending on your hotel's location. That can help you if you’re in Denver, Houston, Calgary and other locations that are energy-driven economies. Those oil prices will have the reverse impact on you, and you’re actually going to do better.”

Jan Freitag, senior vice president of lodging insights and national director of hospitality analytics for Tennessee-based CoStar Group, said past research led him to a less traditional view. Namely, he said he couldn’t find statistical evidence of a correlation between high oil prices and hotel performance.

Jan Freitag

“We couldn’t find a relationship between higher gas prices and a decrease in room demand in hotels [overall] or highway hotels,” he said.

Freitag said his company has looked into this in the past (as did JP Morgan Chase & Co. before the pandemic.)

He said he uses the analogy that if gas prices rise dramatically, that cost difference often won’t be the sole determining factor on making a trip to visit, say, your mother-in-law or taking the family to Walt Disney World.

“Because the difference is just not material. If indeed it is, then maybe you make a different choice in terms of food. You don’t go to a full-service restaurant. You do drive-thru,” Freitag said. “Or you don’t stay in a 4-star hotel. You stay in a 3-star hotel. But it’s really hard to pinpoint that higher gas prices impede people’s ability to travel or willingness to travel.”