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An Open Letter to All Airline Customers

An Open Letter to All Airline Customers

Old Jul 9, 08, 10:43 pm
  #31  
 
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I have to giggle at some of the contents of the thread.....

"We control the oil market because we use more than anyone else!"

That's a heck of claim...

Oil is not prostitution (but close) and while the presence of "Johns" does effect the market prices of whoredom, simply being the randiest John on the market will not move oil prices far. "Control" of the oil market hardly exists, with too many greedy players to allow a single producer to exert much leverage by moving production up or down. Blame the cheap dollar and its decline as having more to do with the price of oil. We spend about $700,000,000,000, that's 700 billion buying oil abroad, and while Boone Pickens is right when he claims we can't drill our way out, we could find ways to lower imports a shade. It won't change the price much, just the flow of dollars, fewer departing.

As for regulating speculators, Good Luck!

It's not the greedy of Wall Street or the Chicago BoT, but those nasty gnomes of Zurich, becloaked sheiks of Araby, and all sorts of polyglots with traders' licenses, who chuckle and look for the next deal, when somebody like Nancy Pelosi, so insufferably uninformed as to be embarrassing to her constituents, tearfully emotes on the evils of speculators (while every airline CFO is busy hedging - no small dose of "speculation"). Those sneaky furriners are about as unlikely to heed calls for stopping their profit making as Hugo Chavez is. Venezuela's oil and Citgo's profits pay for a lot of the favorite toys of despotic dictators, be they wearing red shirts or black ones, and when you own the field, "speculating" is easy, simply pump a little more when you're stuck with a upcoming contract to deliver.
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Old Jul 9, 08, 10:57 pm
  #32  
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This is the wrong approach. If giving a bloody nose to speculators long oil is the fix you want, then just vote against saber-rattling politicians and oil prices will again fall 20-45 percent from the high price touched within the past ten days.
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Old Jul 9, 08, 11:46 pm
  #33  
 
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Originally Posted by mikey1003 View Post
Gary Kelly
Chairman and CEO
Southwest Airlines Co.
Ohh the Irony...

This "speculation" forms the basis of hedging of prices, where a company is basically buying futures for a gas at a fixed price.

Southwest are currently paying a fraction of the price for fuel that everyone else it due to them hedging the price many years ago.

It is the very existence of this speculation which is what makes SouthWest such a viable airline today...
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Old Jul 10, 08, 3:38 am
  #34  
 
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Originally Posted by TMOliver View Post
I have to giggle at some of the contents of the thread.....

"We control the oil market because we use more than anyone else!"

That's a heck of claim...

Oil is not prostitution (but close) and while the presence of "Johns" does effect the market prices of whoredom, simply being the randiest John on the market will not move oil prices far. "Control" of the oil market hardly exists, with too many greedy players to allow a single producer to exert much leverage by moving production up or down. Blame the cheap dollar and its decline as having more to do with the price of oil. We spend about $700,000,000,000, that's 700 billion buying oil abroad, and while Boone Pickens is right when he claims we can't drill our way out, we could find ways to lower imports a shade. It won't change the price much, just the flow of dollars, fewer departing.

As for regulating speculators, Good Luck!

It's not the greedy of Wall Street or the Chicago BoT, but those nasty gnomes of Zurich, becloaked sheiks of Araby, and all sorts of polyglots with traders' licenses, who chuckle and look for the next deal, when somebody like Nancy Pelosi, so insufferably uninformed as to be embarrassing to her constituents, tearfully emotes on the evils of speculators (while every airline CFO is busy hedging - no small dose of "speculation"). Those sneaky furriners are about as unlikely to heed calls for stopping their profit making as Hugo Chavez is. Venezuela's oil and Citgo's profits pay for a lot of the favorite toys of despotic dictators, be they wearing red shirts or black ones, and when you own the field, "speculating" is easy, simply pump a little more when you're stuck with a upcoming contract to deliver.

The fact that the CEOs of so many major airlines don't understand the economics involved in oil pricing is just plain scary. It is no wonder they can't turn consistent profits.
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Old Jul 10, 08, 3:47 am
  #35  
 
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Originally Posted by docbert View Post
This "speculation" forms the basis of hedging of prices, where a company is basically buying futures for a gas at a fixed price.

Southwest are currently paying a fraction of the price for fuel that everyone else it due to them hedging the price many years ago.

It is the very existence of this speculation which is what makes SouthWest such a viable airline today...
Not really. The primary difference between SouthWest and speculators is that SouthWest actually uses jet fuel it trades.

Also, those in denial about speculation rising oil price might want to read this - http://www.businessweek.com/lifestyl...071_625739.htm
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Old Jul 10, 08, 6:03 am
  #36  
 
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Originally Posted by Xevus View Post
Not really. The primary difference between SouthWest and speculators is that SouthWest actually uses jet fuel it trades.

Also, those in denial about speculation rising oil price might want to read this - http://www.businessweek.com/lifestyl...071_625739.htm
False. Southwest does not trade jet fuel. There is virtually no futures market for jet fuel. And, if you wanted to buy a futures contract on jet fuel, it would be [shutter the thought] over the counter (OTC), the very dark, shaddy, and unregulated market the CEOs rail against in their letter. Instead, they mostly trade, like everyone else, the standard NYMEX oil contract, which is for West Texas Intermediate crude oil delivered at a major storage facility in Cushing, Oklahoma. Almost nobody actually takes delivery of the oil they're buying. Southwest is buying it because crude oil prices and Jet-A prices are probably 99% correlated. So, buying one is like buying the other. But, they then sell the position as it nears expiry because they do not want oil.

I think it would be helpful to distinguish between two definitions of 'speculation':

1. Shaddy, back-alley deals that take place "over the counter" and all these financial traders for oil flooding the market with "paper oil"
2. People irrationally believing that oil prices will be higher in the future and therefore being willing to pay more for oil now to be able to sell it at a higher price in the future.

(1) is non-sense, but it's what the airline CEOs are railing against. (2) is quite likely true, but nothing they propose will stop it.
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Old Jul 10, 08, 6:04 am
  #37  
 
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Originally Posted by lancebanyon View Post
The fact that the CEOs of so many major airlines don't understand the economics involved in oil pricing is just plain scary.
As a matter of fact, when I read the OP I found the idea of airline CEOs railing against oil derivatives so ridiculous that I assumed this whole thing was an internet hoax. The whole chain letter aspect of it strengthened that opinion. Is that what this is?
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Old Jul 10, 08, 6:28 am
  #38  
 
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Originally Posted by travelmad478 View Post
As a matter of fact, when I read the OP I found the idea of airline CEOs railing against oil derivatives so ridiculous that I assumed this whole thing was an internet hoax. The whole chain letter aspect of it strengthened that opinion. Is that what this is?
No...unfortunately I and many others got this emailed to us directly from Delta.
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Old Jul 10, 08, 6:51 am
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Originally Posted by MikeyZBT View Post
A simple understanding of currency valuation on an international scale can tell you that the speculation of oil is only partly (and less than a significant part at that) responsible for the increased oil prices.

The downward spiral of the value of the dollar with respect to the currency in the countries where oil is produced is CHIEFLY responsible for the skyrocketing price of oil.
Originally Posted by travelmad478 View Post
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!
Originally Posted by lancebanyon View Post
The fact that the CEOs of so many major airlines don't understand the economics involved in oil pricing is just plain scary. It is no wonder they can't turn consistent profits.
Sounds to me like yet another attempt by the airlines to deflect public opinion from their hideous performance (both customer-service and profit wise).

It reminds me of the joint attempt by the legacies to push airport and ATC fees on other people (including, at the time, Southwest), blaming the ticket tax on their inability to get customers & profits. In that case, even Kelleher stood up and spoke out.

Based on past performances, the airline CEOs simply lack credibility on this issue.

All that aside, from what I can see, the largest part of the oil spike is supply-demand. There MAY be speculation, but it does not appear to be anywhere near as high as the airlines make it out to be. Demand in China, India, and the developing world continues to grow... even as our demand drops slightly. Were there excess supply, speculation would not create the kind of increase that we've seen....

As for regulating speculation, good luck. How long did it take for lender/borrowers to find a way to get around the regulations set up in the S&L crisis? If such regulations really worked, we wouldn't be having a credit crisis.... Oh yeah, that's also driving speculation as investors pull their money out of the stock market and financial investments.

(shakes head at yet another attempt by the airlines to influence the public and deflect from their own woes)
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Old Jul 10, 08, 7:26 am
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Originally Posted by DaDaDan View Post
No...unfortunately I and many others got this emailed to us directly from Delta.
Wow. That makes the whole thing even more pathetic. I took one look at the linked website and just got depressed. The line "Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets" really takes the cake. Always a good thing to haul out the xenophobia card when the going gets tough.
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Old Jul 10, 08, 7:34 am
  #41  
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Originally Posted by DaDaDan View Post
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.
Which is exactly why we should not let the price of oil be determined by those trading paper barrels. This is the heart of what the airline executives are saying. Again, common sense strongly counsels that the price of any item should not be primarily determined by those not actually producing or using it. It leads to exactly what we have -- an oil market not based on supply and demand, but on the whims of huge financial speculators.
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Old Jul 10, 08, 7:53 am
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Originally Posted by DaDaDan View Post
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.
Ah, of course! I knew I forgot something there.

B
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Old Jul 10, 08, 7:57 am
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Originally Posted by iahphx View Post
It leads to exactly what we have -- an oil market not based on supply and demand, but on the whims of huge financial speculators.
If that is, in fact, the case, then the speculative market will correct on its own, and bring some of the speculators down with it. That's happened in other highly speculative trading markets (witness, Bear Stearns).

Remember that the speculative trader only makes money if 1) the price continues upward unabated, making the lower priced option the trader holds more valuable, or 2) someone is willing to take even more risk and pay the trader at a higher value. If the price drops (due to a drop in demand, excess supply, alternatives, speculators closing their positions rapidly, the need for cash by the holders of the options - perhaps to pay off withdrawals from their fund, or alternative investments that can yield more). If the speculator senses that the risk is too high, the price of oil drops, or the excess capital can be invested elsewhere, they will withdraw money and the speculative market will collapse.

This has some hallmarks of a highly speculative market, but it also has nearly all the hallmarks of a supply crunch.

IMHO, the good thing here is that it's driving the American public to be much more conscious of the need to cut consumption, and it appears that Americans are taking steps to make those cuts.... which means that any price drop will be even more pronounced, and there will be sustained benefits as many of the energy conserving options involve capital investment. Meaning that the free market encourages people to make choices that benefit both themselves AND the broader population.

Free markets permit speculation. They also permit losses by said speculators that bet wrong.
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Old Jul 10, 08, 8:04 am
  #44  
 
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Originally Posted by iahphx View Post
Again, common sense strongly counsels that the price of any item should not be primarily determined by those not actually producing or using it.
Sorry, but your post displays such fundamental ignorance of the way commodities markets work that it is not even worth the time it would take to explain why you are wrong. Suffice it to say that there are very important reasons why derivatives exist in the first place (chiefly to benefit the physical buyers and sellers of commodities), and very important reasons why people who do not plan to take delivery of a commodity MUST be allowed to participate in the market.
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Old Jul 10, 08, 8:45 am
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Originally Posted by nerd View Post
A little Econ 101 for all of you who think that the current oil prices are not being driven by supply and demand.

http://krugman.blogs.nytimes.com/200...d-speculation/
geez the new york times has slipped.
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