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An Open Letter to All Airline Customers

An Open Letter to All Airline Customers

Old Jul 9, 08, 5:44 pm
  #16  
 
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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.
Er, it is certainly not a given that the price goes up with each trade. Perhaps the writers of this letter were not aware that the oil price dropped this past week by around $10/bbl?

This whole campaign is completely preposterous. Oil futures and other derivative contracts exist, first and foremost, in order for consumers of oil (e.g. airlines) to have a way to lock in a fixed cost of fuel many months before they are obliged to physically take possession of it. The greater the liquidity and depth of the derivatives market, the easier and cheaper it is for airlines to hedge. Are the CEOs of airlines actually proposing that it should be more costly and difficult for them to do this? You can't limit participation in derivatives to just people who are planning to take delivery--the other side of the trade would disappear!
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Old Jul 9, 08, 6:43 pm
  #17  
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Here's an interesting article on oil speculation, with discussion of the bubble factor- and whether it could bubble and crash like housing, dot com, etc...
According to that article, there is no shortage or major demand increase, so the supply and demand factors don't hold water here.

We do have an ongoing thread in OMNI about this theory.

BTW, a strong open letter like this, signed by 12 airline CEO's- is that unprecedented?
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Old Jul 9, 08, 6:56 pm
  #18  
 
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I will be writing in to my congressmen to tell them that I support the free market and am not supporting more regulation thereof. Like an OP mentioned above, we need to get serious about conservation and find alternatives.
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Old Jul 9, 08, 7:02 pm
  #19  
 
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This is the most moronic idea ever.

All the solutions on that website are impossible. Oil is a global commodity. If you regulate the US futures market, people will just trade it in another market.

Re-establish strict position limits on energy commodities – Position limits have existed since 1936 and work well at curtailing excessive speculation. Any trader not hedging with the intention of taking physical delivery of a commodity must be subject to strict position limits.
1. How do you know what someone's intentions are?
2. Plenty of people are exposed to oil price fluctuation, but don't want West Texas Intermediate crude oil delivered at Cushing, Oklahoma. Take any airline for examle, they are exposed to oil prices and would like to buy futures to hedge that risk. But they actually want Jet-A, not crude oil. And they sure don't want to go to Cushing, OK to get it.
3. There already are position limits. No one is cornerning the market, so within that limit it doesn't matter how much someone buys.

Close the London Loophole – Foreign Boards of Trade with U.S. Terminals trading futures contracts that cash-settle against U.S. contracts should face the same regulations as U.S. exchanges. It is not fair for U.S. futures exchanges to face more regulation than their foreign counterparts trading in U.S. commodities.
1. They can just close their US terminals -> not good for the US.
2. Exchanges could create another contract that settles at a point just outside the US.

Regulate “swaps trades” – All trades in the over-the-counter (OTC) swaps market must be subject to strict position limits. It is unfair to exempt swaps dealers from the same regulations that other market participants face. Experts have estimated the size of the OTC markets to be nine or ten times larger than the futures markets.
1. If I agree to sell you oil for delivery in September. That is a forward/swap contract. You want to regulate that? You'll be regulating all sorts of commerce. People sign contracts all the time that amount to a swap contract. What if I own a small oil well and agree to sell the production for a fixed price to a refinery? That's a swap. Bam! You're a regulated commodities trader. Where's your license?
2. Also impossible. There's no single source for all the swaps in existance. If you enter into a swap with a bank in another country, they're not subject to US regulations. Also, you can enter into a set of two swaps that equals out to nothing. So...is that two swaps that I own...or two?

Fully close the “Enron loophole” – “Exempt Commercial Markets” that trade U.S. contracts nearly identical to fully regulated contracts should not be exempt from the same regulations that apply to Designated Commercial Markets such as the NYMEX.
An "exempt commercial market" is basially a glorified bulletin board. Two people are trading with each other, without the exchange as an intermediary. The "market" is just a place people go to find other counterparties. If I sell you oil on Craig's List, do you want that regulated?

Bring transparency to all energy trading – Positions of traders in all markets should be reported to the Commodity Futures Trading Commission (CFTC) and should be categorized based on where the trades occur and who is doing the trading. This will provide vital information to detect and prevent market manipulation.
Completely impossible. Again, it's a world-wide market. At best, you're going to prevent people from doing business with or through US-owned banks and force people to use foreign-owned banks.

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.
That's not true. The price can go up or down. Why would anyone buy a barrel of oil from someone at a price higher than they had to? If you try to sell me oil with $2 of "extra costs"...I'll go to someone else and buy it for only $1.90 in "extra costs". This will go on long enough that only people selling at the true value will have buyers.

-----------------------------

Anyone who believes that the price of oil is being driven up by speculation alone should back that position up with cold, hard cash and short a whole bunch of oil.

The price of oil is also determined by people's belief about future supply and demand, but people's beliefs can't be regulated.

This is a classic "Pay no attention to the man behind the curtain" move. The airlines are widely hated for raising fees and screwing passengers, so they say, "don't blame us! it's those blasted speculators!"
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Old Jul 9, 08, 7:22 pm
  #20  
 
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Originally Posted by Gargoyle View Post
BTW, a strong open letter like this, signed by 12 airline CEO's- is that unprecedented?
They are all facing the same crisis. Any no matter what happens today, they've already lost billions this year. I see Federal help coming.
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Old Jul 9, 08, 7:40 pm
  #21  
 
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Economics?

This was Finlandia's comment in the other thread that got started:

[vent] Nonsense. It's impossible for futures trading to drive up spot prices because the value of futures contracts sold by sellers (who expect prices to fall) equals the value of contracts bought by buyers (who expect prices to rise). The net effect on the market must be zero. Besides, the futures contracts are paid for in cash, not oil. They're nothing more than bets on which way prices will go. Thus, futures trading in oil is like people betting on a World Cup match in progress - there is no effect on the outcome.
What?! So how do you explain the "tulip mania" in 17th-century Holland and all the other crazy economic bubbles that have happened through history? Speculation DOES drive up prices, most recently seen in the real estate market.
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Old Jul 9, 08, 7:46 pm
  #22  
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Perhaps the airlines can now understand what it is like being a consumer.

Originally Posted by Canarsie View Post
The new home of this thread is now the TravelBuzz! forum, where FlyerTalk members who are members of the frequent flier programs of other airlines can participate in this discussion.

Why limit this to Delta forum FlyerTalk members only?

Thank you in advance for your understanding.

Regards,

Canarsie
Co-Moderator, Delta forum

I am a bit ambivalent about this open letter.

First: if oil prices are being illegally manipulated, I hope those responsible are identified and hung by their sensitive parts.

Second: I concede that airline ticket prices are likely underpriced, even without allowing for the impact of recent fuel price increases.

However, consider that jet fuel prices have increased from $1.86/gallon to $3.10 per gallon from March 07 to March 08... the latest month for which data is available on the Bureau of Transportation Statistics website:

http://www.bts.gov/publications/whit...uel_table.html

This represents a 67% increase over the year.

Now, ask yourself, if airline management could have increased air fares by 67% over that same period (even if fuel prices had stayed constant), would they have hesitated for an instant?

Of course not.

Would there have been a joint letter issued solicitating support for an effort to control escalating air fares?

Of course not.

The legacy carriers just do not have the clout, in the current market, to pull off such a fare increase. Had they the clout, it would be a done deal.

I am not engaging in schadenfruede here... since it is clear that the airlines are going to pass on any pain they can to the customer, if only through ridiculous fees and add-ons that will never go away, even if oil prices plummet.

Welcome to the (hopefully) free market. Airline management must be learning that sometimes its a real b**** being a consumer... especially when you are accustomed to being the controller rather than the controlled. I offer this observation as someone who took an extra three hours to get home today because I (admittedly, of my own volition) flew from Point B to Hub to Home because Hub to Home direct (which would have been more convenient for a variety of reasons) cost 2-1/2 times the fare for Point B to Hub to Home.

High fuel prices are just exacerbating what has become an increasingly dysfunctional industry, even under the best of circumstances.

I believe in a free market, so I stop just short of suggesting that the air transportation system in the US is too important to be left to the airlines to run. The greatest argument against re-regulating the entire industry is that the concentrations of dunderheads in federal bureaucracies such as the FAA is at least as great as that in airline management.

At least airline CEOs can, in theory, be fired for underperformance.
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Old Jul 9, 08, 7:54 pm
  #23  
 
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Originally Posted by Rambuster View Post
The Economist has an intersting lead article on oil speculation:

http://www.economist.com/opinion/dis...ry_id=11670357

Also interesting to see that most of these airline CEOs are playing the hedging (or speculation) game heavily.
Exactly. Hedging is speculation, too -- if the oil price drops, the airlines effectively end up paying higher-than-market prices for oil.

And if they think that the US government can legislate worldwide trading in commodity futures, they are even more naive than I thought.
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Old Jul 9, 08, 7:55 pm
  #24  
 
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Originally Posted by hotturnip View Post
This was Finlandia's comment in the other thread that got started:



What?! So how do you explain the "tulip mania" in 17th-century Holland and all the other crazy economic bubbles that have happened through history? Speculation DOES drive up prices, most recently seen in the real estate market.
Tulip mania was speculation in spot prices. This comment is referring to futures prices. Of course, he's actually wrong. If I sell oil for delivery in November, one way to be sure to have the oil in November is to buy it today and put it in storage until November. If demand for oil in the future goes up, it can increase the demand today because oil is a storable asset.

P.S. What's the other thread you're referring to?
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Old Jul 9, 08, 8:19 pm
  #25  
 
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Originally Posted by DaDaDan View Post
Tulip mania was speculation in spot prices. This comment is referring to futures prices. Of course, he's actually wrong. If I sell oil for delivery in November, one way to be sure to have the oil in November is to buy it today and put it in storage until November. If demand for oil in the future goes up, it can increase the demand today because oil is a storable asset.

P.S. What's the other thread you're referring to?
Spot on! The futures price is simply the spot price plus storage costs - otherwise you'd buy it and store it in an arbitrage situation.

The real problem that I see with this e-mail is that the regulations they're proposing don't seem to stop the underlying problem - people believe that oil will go up, so they're buying it! Look at the internet bubble of the 90s and you saw people buying shares in firms at valuations that were beyond financial metrics. People bought on belief. These people didn't just include Ma and Pa Kettle who lost their shirt. The real problem was with the large institutional investors that saw $ signs and went for the fast payoff. Now, you have a tremendous amount of capital from hedge funds, etc. that see the $ signs in commodities like oil and are again going for the payoff.

One of the points that the e-mail brings up is to change the amount of money needed to buy a contract (i.e., reduce the leverage). But this just shifts where the money comes from. Hedge funds are used to borrowing heavily from brokers when executing trades already. Changing how much money has to be put down to buy a contract just shifts the profits to the banks who were already used to loaning the hedge funds money to buy their stakes.

All in all, I think that while the airlines are somewhat right - speculation is driving / can drive prices in the short-term - the long-term effects of the bubble will be that the price will be "righted" eventually. I don't know if that means that prices are that far off from where they need to be, but this is a short-term problem (year or so) and had the airlines adequately prepared for this through good hedging strategies, they wouldn't be advocating such ridiculous measures now. If you knew your business was susceptible to oil prices, maybe you'd want to lock-in a price just like you do for pilot contracts and airplanes.

By the way, the idea that there are as many buyers as sellers in the futures market and that the zero-sum game of the market doesn't have an impact are wrong, in my opinion. The secondary market for stocks is similar - people sell shares when they think they're at a maximum price and people buy when they think it'll still go up. There shouldn't be any difference in futures - more people that think the price will go up will drive the price up. I think it's that simple.

B
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Old Jul 9, 08, 8:52 pm
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Originally Posted by global_b View Post
Spot on! The futures price is simply the spot price plus storage costs - otherwise you'd buy it and store it in an arbitrage situation.
Actually, it's the spot price plus interest minus storage costs.

If I buy the oil now, I have to pay for it now, so I loose the interest payments over the next few months, which means my counterparty has to pay me for that. Of course, I now have to put it in storage, which means I loose that money.
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Old Jul 9, 08, 9:04 pm
  #27  
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As I said in a thread in the CO forum, I am amazed at the number of people who don't think something "funny" is going on in the oil market. We have an all-time inflation adjusted record price in oil -- by more than 35% -- and there are no signs of shortage! People, you don't need to be an economist to suspect something is wrong here.

Of course, there is much precedent to folks fixing the energy markets. Does no one remember Enron, and the supposed California electric "shortage"? That shortage never actually existed, and once Enron went bye-bye, California had plenty of power.

Indeed the collapse of Enron sowed the seeds of the current problem. Their trading division was sold to a Wall St. brokerage house, and Wall St then took control over the energy futures markets. These markets were never designed to handle "investors" -- futures contracts aren't like ownership of a company. The more money you pour into them, the more the price goes up, supply and demand be damned.

So if you want oil prices to be determined (like gold) as a "financial instrument," feel free to ignore the concerns of the airline executives. But if you believe that REAL oil buyers and REAL oil sellers should control the prices -- and not those only interested in trading "paper barrels" -- maybe it would be worth your time to read the anti-speculation website and learn something about the issue.
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Old Jul 9, 08, 9:10 pm
  #28  
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Originally Posted by tomh009 View Post
Exactly. Hedging is speculation, too.
No. By definition, hedging reduces an exposure to a risk.

Speculation seeks risk. Somewhere, you've got something backwards.
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Old Jul 9, 08, 10:14 pm
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Originally Posted by global_b View Post
By the way, the idea that there are as many buyers as sellers in the futures market and that the zero-sum game of the market doesn't have an impact are wrong, in my opinion. The secondary market for stocks is similar - people sell shares when they think they're at a maximum price and people buy when they think it'll still go up. There shouldn't be any difference in futures - more people that think the price will go up will drive the price up. I think it's that simple.
This is certainly true. If lots of people mistakenly believe that oil is much more valuable than it really is, then they'll be willing to pay more money for it. There may even be people who know in their hearts that the prices aren't justified, but are willing to take a risk and try to ride the prices while they're going up. But eventually, it will get to a point where enough people will say "there's no way real supply and demand can support this, I'm going to go short on oil" and then the prices will start to fall.

To iahphx's statement, I'm not claiming that prices aren't higher than supply and demand support, I'm just saying that the rediculous suggestions made in this letter won't do any good at curtailing it. The price has nothing to do with the purchase or sale of futures. It has to do with a (possibly) irrational expectation about present and future supply and demand. And, you're right, there may be no supply shortage right now, but prices can still go up today if people think there will be a huge increase in demand or decrease in supply in the future. People will be incentivized to store the oil for later rather than use it now.
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Old Jul 9, 08, 10:35 pm
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Originally Posted by iahphx View Post
Of course, there is much precedent to folks fixing the energy markets. Does no one remember Enron, and the supposed California electric "shortage"? That shortage never actually existed, and once Enron went bye-bye, California had plenty of power.
Actually, there was a shortage. Enron controlled some of the power plants in California and asked/suggested that they go off line for maintenance. This created a localized supply shortage since there is limited capability to transmit power from other parts of the country. The only reason this worked though was because they controlled supply and transmission (transportation) was inadequate. Neither of those things are true about oil today.

Originally Posted by iahphx View Post
These markets were never designed to handle "investors" -- futures contracts aren't like ownership of a company. The more money you pour into them, the more the price goes up, supply and demand be damned.
But there's no reason why they can't handle investors. It's not true that the more money you pour in, the more the price will go up. Investors can invest in the short end of the contract. They can make the bet that prices will go down by selling oil for, say, November delivery. We agree on $130 today. November comes and if the price is only $110, I just made money. The problem isn't that there are investors or not investors. The problem is that everyone (speculators and end-users) is buying oil and no one is selling it.

Originally Posted by iahphx View Post
So if you want oil prices to be determined (like gold) as a "financial instrument," feel free to ignore the concerns of the airline executives. But if you believe that REAL oil buyers and REAL oil sellers should control the prices -- and not those only interested in trading "paper barrels" -- maybe it would be worth your time to read the anti-speculation website and learn something about the issue.
Gold is determined as a "financial instrument" because there is very little end-use demand for gold and historically it has been used as a store of wealth. And it is convenient in that respect. You can store a whole lot of dollars worth of gold in a very small space, so the storage costs are virtually nothing as a percent of the total value. Oil on the other hand is very inconvenient to store: you can only fit about $130 into a barrel (42 gallons) and it leaks and then it's not worth it to soak it up and filter it depending on where it leaks. It's super heavy and therefore expensive to transport. Plus all sorts of other reasons.
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