This is kinda long, but fascinating. It's a letter sent to one of my coworkers who happens to be on NWA's Frequent Flyer Mailing List.
Dear ***** *****,
An Open letter to All Airline Customers:
Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now. Visit www.StopOilSpeculationNow.com.
For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.
Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.
Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.
Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.
The nation needs to pull together to reform the oil markets and solve this growing problem. We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com.
Robert Fornaro
Chairman, President and CEO
AirTran Airways
Bill Ayer
Chairman, President and CEO
Alaska Airlines, Inc.
Gerard J. Arpey
Chairman, President and CEO
American Airlines, Inc.
Lawrence W. Kellner
Chairman and CEO
Continental Airlines, Inc.
Richard Anderson
CEO
Delta Air Lines, Inc.
Mark B. Dunkerley
President and CEO
Hawaiian Airlines, Inc.
Dave Barger
CEO
JetBlue Airways Corporation
Timothy E. Hoeksema
Chairman, President and CEO
Midwest Airlines
Douglas M. Steenland
President and CEO
Northwest Airlines, Inc.
Gary Kelly
Chairman and CEO
Southwest Airlines Co.
Glenn F. Tilton
Chairman, President and CEO
United Airlines, Inc.
Douglas Parker
Chairman and CEO
US Airways Group, Inc.
4 comments:
I received the same email, albeit from United. I don't pretend to understand the economics of it, but I must say my bullshit alarm is going off on this one.
For one thing, "speculators" are just too easy a villain for the public, Congress, and probably soon federal prosecutors, to blame. Aren’t all investors, and particularly futures investors "speculators"? What next? The Bolshevik-Jewish consipacy?
A sample counter-argument to the speculator theory can be found at: http://mjperry.blogspot.com/2008/06/economics-of-futures-trading-part-i.html, which asks how it is that if “Exxon Mobil, one of the largest oil producers and private oil companies in the world, has NO control over the world spot price of oil, so how could a small group of speculators?”
For another, the massive increases in demand for oil in China and India, that are noted in the above-linked post, seem more pressing and plausible causes of higher prices than some chimerical market trickery. Perhaps trading devices contributed to a more rapid rise in price than would otherwise have occurred, and maybe the price is a bit higher due to "speculation," but the basic problem of gas prices that are too high to sustain a Chevy Suburban, three-hour commute, exurb lifestyle on a Wal-Mart salary (which, let's face it, is what everyone is griping about) is surely not something that can be solved by an Act of Congress or by tossing a couple of innovative investors in jail. Personally, I am not convinced that high gas prices are a bad thing. A world in which the average Joe cannot afford to eat strawberries shipped in from New Zealand or somewhere in the middle of winter, or live miles from his job and drive a 40-ton truck may be unpleasant to the average Joe, but it does not seem to me an intrinsically problematic state of affairs. [Note: I assume for the sake of argument that our Joe is well above average.]
Finally, it seems odd that the CEO of Southwest Airlines is a signatory to this email. One of the main reasons Southwest is doing so well at the moment is that it hedged against high oil prices so effectively that it locked in more than 70% of its jet-fuel requirements this year at a price equivalent to $51 a barrel for crude oil. That, gentlemen, is called speculating.
Yes, I'm well above average. I drive a little Japanese car 35 miles to work everyday. I agree that blaming speculators is easy game for politicos/press/airline CEOs, but I don't think it's too far off to say that they're responsible for what amounts to 20 to 40% of the high price. And does Exxon REALLY have no control over the price?
It's strange, I was about to say what Andrew did practically word for word, but he saved me the trouble. Nice one, limey.
There are lots of pieces to this puzzle, but maybe everyone's picking on the speculators because that's the only piece that's perceived as fixable. I mean, how do you make the growing Chinese middle class stop buying cars?
I have heard arguments that trying to regulate speculators could be even more damaging to oil prices. That argument was made by the speculators.
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