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Airline Industry’s Cry For Help

Posted on Friday, Jul 11th 2008

I got this email from United Airlines today, and thought it makes an important point …

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.

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.

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Sramana,

Do you think, ‘only’ speculation is driving the entire thing up?

No, I am not talking about the Peak Oil thingie, but think about it, we are facing a gross supply demand mismatch, that too fueled [pun unintended] by backlog in refining infrastructure…

Soham
Jump Up!

Soham Das Friday, July 11, 2008 at 7:06 AM PT

No, but it is a piece of the equation that ought to be stopped. The increasing world demand can only be mitigated via alternative energy mechanisms, which is a longer term effort.

The speculation piece is a layer of value erosion that is not worth entertaining.

Sramana Mitra Friday, July 11, 2008 at 10:20 AM PT

I dont claim to be an authority on oil speculation or the effect of it on world prices but read this post at the same sitting as yours and thought you may also be interested in the analysis.

https://www.upgradetravelbetter.com/2008/07/10/airlines-unable-to-manage-risk-scapegoat-oil-markets/

regards

Carl Friday, July 11, 2008 at 8:08 PM PT

Speculation is one driver and vanishing resources, the Middle East crisis, and currency fluctuations are others. Ultimately supply balances with demand for oil and airline services. Investments in clean modern jet engines which burn up to 30% less fuel would help to obviate price rises and rationalisations of over supplied routes running at 24% capacity would be other intelligent measures.

David Bristow Saturday, July 12, 2008 at 4:41 AM PT

Many people say that speculation drives up the cost of most commodities from oil to corn to wheat to metals. Even a Middle Easter oil prince blames speculation for a large portion of the inflated price of a barrel of oil.

Economics tells us that supply and demand are the primary determinants of any commodity. So one would think that, if demand is insufficient, some speculators will get stuck with contracts that they will have to sell at a loss. Who knows when that will happen. It took years for worthless Internet stocks to be shown to be so. The horrible lending practices over the last decade have led to overinflated housing market values. The same can and is likely happening in energy. Everyone needs a roof and the need the oil to keep it warm in winter or cool in summer. That makes sense. The internet stocks craze never made much sense to me.

Demand is such that their is always a ready and willing buyer for energy at whatever price the speculators set.

Eventually gas will be too expensive as will the cost of an airline passage as will the cost of heating a home break the budgets of many a family come this winter. Watch what happens to the demand for oil.

Energy is a necessity so that companies and families will continue to spend to acquire energy, until the cost of the energy will surpass their financial ability to pay. Many other expenses will get pushed aside to free capital for increased energy costs.

I wouldn’t blame speculators for all those huge SUVs and trucks on the road. I wouldn’t blame them for all those huge McMansions that have been built. I wouldn’t blame them for our lack of an energy policy over the last couple of decades. We didn’t learn in the 70’s; but we’re going to feel the pain this time around. We are going to experience the largest transfer of wealth in the history of mankind from the countries that use energy to those that have reserves.

As inhabitants of the same world, we need to get our act together quickly. The United States will become a poor nation very quickly, if currents trends are not reversed very quickly. Our wealth and a large proportion of our equities will be owned by the Middle Eastern princes. We are exporting our wealth to energy-rich countries, and to China. Trade imbalances caused by the inflated cost of energy and by the deflated value of Chinese currency is taking too much wealth out of the United States.

We need to do everything we can to achieve energy independence as soon as possible. Anything and everything from alternative energy to hybrids to smaller vehicles, shorter commutes, smaller homes, more efficient factories, wind, solar, nuclear, increased exploration and drilling, etc, etc, etc. Everything and anything.

The only thing that will cause us to finally face the music is the increased pressure from these speculators. By artificially increasing the price of energy in an accelerated timeframe, these speculators are showing us the pain more quickly so that we can all come together to create solutions to the problem of our addiction for energy.

So yes, I support any restrictions on speculators that may artificially inflate the cost of energy and other commodities. The pain is becoming way too much for too many. But let us not forget the lesson of what they have already taught us. We will feel real pain if we don’t fix the underlying problem of demand.

Even if and when we begin to consume less energy in the West, there are areas of the world who are only now at the beginning of their growth curve for energy consumption. Places such as India and China will be using much more energy in the coming years than they are today.

As a world, we need to get to a place such that we don’t care what the price of oil is that day. Only backwards peoples and societies will still be using costly, polluting fossil fuels for their energy needs. Smog-filled urban centers the world over will yield to modern, clean metropolises.

We can dream. But we must act. Today.

Realtosh Monday, July 14, 2008 at 8:24 PM PT