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Comments (9)
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Save/ShareIn a historic move, a dozen airlines have emailed a form letter to their frequent fliers asking them to contact Congress about our nation's oil policy. This is the first time that airlines have tried to turn their customers into a political lobbying group.
Millions of travelers received the emails yesterday. The airlines asked their customers to go to stopoilspeculationnow.com and send a form letter to lawmakers. The letter asks Congress to more tightly regulate U.S. markets for buying and selling oil futures.
Here is the backstory, with answers to key questions:
What is the core issue?
Everyone assumes that the price of oil is the result of supply and demand. And most people assume that oil has become more costly because more countries (such as China and India) have been buying oil and because no new oil fields have been found to meet demand (plus, there are continued troubles in the Middle East). But the airlines say there is more to the story. They calculate that if supply and demand was all that mattered, crude-oil prices should be about $60 per barrel. Instead, prices are roughly twice as high. The airlines think they can finger the villains responsible for the recent spurt in oil and jet fuel prices: the oil futures market.
What is the oil futures market? A "future" is essentially a contract to buy or sell a particular amount of oil on a set date in the future at a price agreed upon today. The idea is to allow companies, such as Southwest Airlines, to make a bet on the future price of oil. Let's say that Southwest locks in a cheap price today for oil that will be delivered a year from now. If in 2009 oil prices are much higher than today, the company will enjoy today's relatively bargain price for the oil it receives.
Why do the airlines think that the oil futures market isn't working properly? The airlines say that the oil futures market works fine when knowledgeable, interested parties, such as themselves, are the ones who are placing the bets. But today, they point out, a majority of the investors buying and selling in the oil futures market are speculators--people trying to profit and the market's ups and downs, not actually take possession of any oil. The airlines say that, because of the way the rules of the game are set up, these speculators have an incentive right now to drive prices up unnaturally high. For example, they say it's too easy for uninformed people to speculate in the market. To generalize broadly, the rules of the game allow you to buy futures contracts without having to put very much money up front. According to once investor, to buy 1,000 barrels of oil ($135,000) a big investor need put up only about $8,000. The airlines think that Congress should require speculators to put up more money up front, which will discourage trading.
Are speculators to blame? Nobody knows for sure, but several people are skeptical. The Princeton economist and New York Times columnist Paul Krugman doesn't think so, blaming supply and demand instead. Fortune magazine agrees. Oil company executives also agree, except that they blame government regulations and high taxes for discouraging investment in drilling for new oil gushers.
Should the airlines ask their customers to become politically activist on this issue? Sound off below.
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Even if they are wrong, we basically are near a state of a national energy crisis, therefore our government should be doing all it can to keep prices down. If people are making money with no added value there is no reason not to pull them out of the equation. i.e. do we ready want oil speculation to match the housing speculation of the last few years.
Posted By Iolaire McFadden on July 10, 2008, 11:05 AM
The Energies Commodities Market should not be regulated. It should be Nationalized in the interest of National Security.
Posted By M Lupton on July 10, 2008, 9:05 PM
The leaders of the “major” airlines simply have had no idea how to ever make money in a deregulated environment. Finger pointing is the last defense of the incompetent. We can only expect things to worsen for all of us dependent upon air carriers. read more at http://www.ThePHoenixPrinciple.com
Posted By adam hartung on July 11, 2008, 4:59 PM
Why don't you work on obtaining solar energy for the state of Nevada?
Posted By Lyle Kelley on July 12, 2008, 4:02 PM
It is a matter of national security for us to review all facets of the oil crisis--from futures to energy source alternatives to drilling on our own land.
We could supply all the oil the USA needs--right here at home. I hate the idea of drilling in pristine wilderness areas, but I hate the idea of a broader economic collapse (from airlines to heating our homes) more. There is no way for airlines to continue flying with rising oil prices, even if they slash every salary from top to bottom. It simply does not add up.
So I say, let them have their customers lobby Congress. But that should only be the beginning.
Posted By Lisa Bergren on July 14, 2008, 2:28 PM
Since the oil production is mainly controlled by overseas sources, like the Arabs and the Venezuelan strong man, we are at their mercy. And there is one airline which bought futures when the prices were significantly lower than recent historical peaks. Southwest has taken delivery or sold for profit their early purchases. American had some protection for a period, but far to small amount to provide for their huge fleet.
I have dealt in futures in the late 70's and early eighties. And even took delivery on one or more contracts. Yes, I violated several maxims to do it profitably. I bought long term which was at least a year for the tax man in those days. I had enough cash to buy significant amounts and it financed a very significant addition to our family stock positions. Later when we sold out. None of it was in the fuel oil or crude oil pits. I didn't know enough at the time fir those. My oil positions were edible soy which makes fake butter among other things.
Finally I would not jump into this market for two reasons. First it is out of control, second we don't need the money.
Posted By duke on July 14, 2008, 4:02 PM
This is too funny. The airlines didn't care when thousands of passengers were stranded on the tarmac for hours without food, water, or bathrooms. Now they want our help? Gimme a break.
Posted By david b on July 14, 2008, 7:07 PM
They shoud have to pay the full price for each barrel of oil same as we do for our stocks and bonds. Not $8 to control a $140 berrel of oil.
Posted By Ingram on July 15, 2008, 7:37 AM
Something needs to be done about the energy crisis. Whether it is regulating, deregulating, drilling or using reneweable sources. The government needs to get involved, that's what governments are supposed to do.
However, I have no sympathy for the airlines. When my daughter had to be admitted to the hospital for three days I got charged $300 to change three tickets to the next day. The airline told me that the only way we would not be charged was in case of death. NICE! No sympathy from me.
Posted By P. Archevald on July 16, 2008, 10:58 AM