Oil Speculation

[Jump]

I received the following letter from one of the airlines. Just thought that some would find it interesting:


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.

[insite]

they tried this with onions decades ago. the result: MORE volitility.

[Quickurt]

I can't remember, and don't have the time right now to search it out, but a large part of the speculation problem is because it is now a multi-national trading house in London, New York and another offshore location, I can't remember.
The traders are using this multi location to get around restrictions of both the US and the UK.
The answer is still fairly simple. If Bush would announce a NASA moon shot style initiative to have energy independence by 2018 and use an executive order to remove all drilling restrictions, the profit incentive would switch from futures to drilling and production. OPEC and other oil producers would lower prices dramatically to head off the new, massive production profit centers that are not theirs. Both the switch of profit incentive for investors and OPEC's reaction will dramatically reduce the speculative portion of oil prices. It will take longer term to make a dent in the supply/demand equation and the reality is it may never drop oil to much lower than inflation adjusted 80 to 100 dollars per barrel. It should, however, head off 250 per barrel oil.
Removing the huge, quick buck investors heaven of oil futures will also free up investment capital for the more realistic alternative sources, as well as R&D money for yet to be realistic alternatives.
Again, electric commuter transportation from alternative sources generation, as well as new cleaner techs for coal are very promising. I say save the petroleum for the Porsches and long distance travel that makes electric less useful.
If we generated zero electricity with petroleum, that in and of itself would make a dent in the term length of oil supplies we have.
We have coal, gasified/liquidized coal, hydro-electric, geo-thermal, and nuclear. We don't need petroleum to generate electricity. Wind and solar are also becoming more commercially viable, but still have a long way to go.
All these alternatives are the future, there is zero doubt. However, the unrealistic attitude of the liberals and greens that it will be a solution in less time than getting new oil production on line is absurd. They say alternatives and conservation are the answer because it will take 5 to 10 years for new drilling to hit the market? And how long will yet to be discovered alternatives take? What about five years from now, as a comparison of your using the same line 5 and 10 years AGO?
How many more scams like ethanol will we have to sort through before the reality of the new energy economy is here?

[insite]

great post

[Brucelee]

In theory, futures contracts actually help to bring about price stability. I guess no one quite knows how it works in practice.

I have read both sides and clearly do not know.

Perhaps we can ask Geoge Soros?

:D

[insite]

In theory, futures contracts actually help to bring about price stability. I guess no one quite knows how it works in practice.

I have read both sides and clearly do not know.

Perhaps we can ask Geoge Soros?

there are a few things i'd like to TELL george soros.....

i've read that futures contracts do actually stabilize prices, but quickurt does have a point: the articles i've read with this assertion used domestically traded commodities as their case studies. if what we have here is an internationally traded commodity & the laws of various countries are used to circumvent the spirit of certain regulation, i think it's certainly possible for traders to add volitility.

[Brucelee]

there are a few things i'd like to TELL george soros.....

i've read that futures contracts do actually stabilize prices, but quickurt does have a point: the articles i've read with this assertion used domestically traded commodities as their case studies. if what we have here is an internationally traded commodity & the laws of various countries are used to circumvent the spirit of certain regulation, i think it's certainly possible for traders to add volitility.

It is certainly possible. If there is any collusion of any kind, one can see futures traders actually manipulating prices. I believe that is what Soros was accused of with the Pound Sterling.