Redhead

Wow, what a display (like our politicians) of not understanding basic economics.

OTH, I really don't see what is so wrong about speculation (and I don't believe that is what is primarily driving oil costs). It is capitalism at work. Vive the free market.

yourfather

hedging isnt speculating, its trying to lock in the lowest price at a specified time and try to remove any cyclical risk on a spot market.

travelmad478

No, it's locking in a price, period. Whether that price ends up actually being the lowest price available through the duration of the contract is a big question mark. Southwest has been successful in their hedging in that they speculated that spot fuel prices today would be higher than they were months or years ago, when they bought the contracts. If they had been wrong, would you then call them speculators instead of hedgers?

brendog

Blah blah blah... Blame the oil companies and commodities traders for our bloated and inefficient business models.

What was this supposed to accomplish, aside from winning support from the public? This was pretty transparent BS to me...

DaDaDan

It is not determined by people trading paper barrels. No one wants, nor are they ever likely to want, to hold oil for its own sake (as is the case with gold) for all the reasons I already said. Gold is a store of wealth. Oil is not and will almost certainly never be.

Anyone buying oil or selling oil, even if they have no intent to receive or make delivery of actual oil, is dependent on the actual supply and demand for physical oil. If somehow the "paper oil" became extremely expensive, I could simply sell you some "paper oil" at a high price and then buy real oil at a low price and give it to you in satisfaction of your futures contract.

markwtaylor

Everybody has bits of the reason, but it is never as simple as one issue. What everybody keeps forgetting is that the oil companies are reporting the highest profits in years. For those of you who failed economics, profits are not the same as income or even sales. Profits are what the CEOs use to purchase their new yachts every year. If the profits are invested in researching alternative fuels, you can bet your a$$ that the companies would report that as R&D and take a tax break rather than paying taxes on the profit. But they are not. They are simply pocketing the money and making their lives better at the cost of the environment and everyone else.

Of course, that is only one issue. Another is that idiot in the White house who has destabilized the mideast for his own profit-driven reasons.

Argue and whine all you want, but before you can convince any intelligent life of your inane words, go look up the profit margins of these oil companies.

Oh, yeah. And look into the cartel that Drummond Coal is part of that snapped up a high percentage of the copper mines to ensure that alternative energy like solar power was not viable by inflating the cost of copper. Self serving at it's finest.

Global_Hi_Flyer

Define profit.

What is the basis of cost for the raw material? Is it the original book value less any depreciation taken? Is it a marked-to-market value?

The more important measure is profit margin. How do the oil companies compare to, say, Microsoft? Or your favorite grocery chain (also dealing in commodity items)?

Likewise, profit<>cash flow.

R&D is often capitalized with the expenditures taken from cash flow. R&D will generally not affect profit, and therefore income tax breaks on the R&D won't accrue (that said, there are exploration and other tax breaks available, but on a strict, profitability basis, capitalized R&D is depreciated - not expensed in the year incurred).

DaDaDan

I believe you mean financial accounting...and I got an A.

The oil companies are complete price-takers. They pull oil out of the ground and they sell it for the current market price. They're making money because all the oil in the ground that they have the right to is now so much more valuable... They paid for the rights to the oil when the price was low, and now the price is high. Makes sense to me.

Pure exploration would be an R&D expense and reduce profits. Building, rebuilding or expanding a refinery or oil extraction well/platform would be a capital asset and would not generate an immediate expense. You'd move money from Cash to Property, Plant, and Equipment without touching the income statement. Only once you extract the oil would you depreciate the asset and generate expenses to reduce profits.

psemerson

One of the oldest rules in politics is that when you ask for something, you offer something. Pessimists can say this is where special interests buy politicians, but it also works on the citizen level. When a politician asks for your vote, for example, you do get a pledge of what he or she will do. Whether they actually perform those actions in office is always up for debate, but at least there's an offer to ask for your action as a citizen.

This letter offers nothing. Squat. And I'm not asking for free miles for writing a letter or anything like that. I don't see any pledge that, if speculation is curtailed and oil returns to a "fair-market level" or however they want to define a lower price-per-barrel, we'll see a rollback of any of the tick-tack fees on baggage, seat location, snacks, etc., that are being blamed on that huge cost of oil/jet fuel. Nor is there a offer to return dropped routes that got the knife, again, due to those oil prices. I don't even see a pledge to offer to do anything right by the consumers addressed in this letter.

To be honest, this is an act of corporate selfishness, carefully worded to incite their customers to action and making sure that there's no responsibility on their part for, well, anything. You have a large group of people who either guessed wrong on prices or decided to literally take a flyer and not cover themselves in the same market they now deride.

I'd be willing to go to bat on this, but the airlines need to do better.

Redhead

So what? Companies are in business to make a profit. Without profits, there would be no companies. I have no issue with businesses maximising their economic utility (read making profits). Heck, if the airlines had made some profits in the last 80 years, we wouldn't be reading this stupid letter.

Edited to add: And it's not just CEOs who benefit from profits, but all the shareholders of the company who are maing either more dividends or seeing a rise in the value of their asset (stock). I have zero issue with CEOs or other business execs being paid well if the company is doing well in terms of profit and growth

nnn

No. You're playing semantics. Another way to look at it is, if you hedge against one risk, you're taking another.

"Risk" is a vague term, and, if interpreted broadly enough, every trading action assumes "risk" on some level.

travelmad478

Actually, salaries, bonuses, and realized capital gains are what the CEOs use to purchase their new yachts. It may surprise you to learn that the CEO of a company does not in fact receive the company's net income every year. Maybe you didn't fail economics, but you sure are on shaky ground in accounting.

You might want to take a look at the copper supply structure too, when you get done reviewing your accounting textbook. Copper has one of the more fragmented supply structures of the major base metals, being a fairly abundant element that is found all over the globe. Of the 18 million tons of primary metal mined last year, no single continent accounted for more than 20%. The largest owner of reserves is Chile's Codelco, a state-owned company, and even they have less than 20% of the world's known copper. No one can "snap up a high percentage of the copper mines." Copper prices are high mainly because there is a lot of incremental demand, chiefly from China, and because the supply is often at risk from strike action or power shortages--not because some nefarious "cartel" is cornering the market. Please, enough with the baseless rumor-mongering.

DaDaDan

...Except when a rogue trader from Sumitomo is doing just that. But I digress. In general, you're right. Cornering the market is hard, illegal, and financially very dangerous.

vsevolod4

While I applaud the industry-wide effort and focus on reducing energy costs, the approach is a bit naive.

Certainly, there is "speculation" but then there is speculation on any product or commodity in a market and for those who have taken Economics courses, there is a value to this speculation in that it creates a more efficient market, with arbitrage resulting in a better and more stable price rather than a higher price.

Having said that, the normal rules of supply and demand do not apply here, since:
a) the world is collectively accepting not only a de facto but intentionally monopolistic cartel that artificially controls supply; monopolies can and do destroy the supply-demand equilibrium;
b) supply is dominated by countries who can hardly be thought of as being friends of either capitalism or democracy, nor the United States: Iran, Saudi Arabia, Venezuela, Nigeria and Norway.
c) attempts to reduce reliance on artificially-supply-constrained oil and to make the oil market more "fluid" are stymied by myriad special interests who oppose domestic offshore drilling, drilling in Alaska, building nuclear plants, harvesting shale oil, converting coal to oil;
d) logic, economics and rational, scientific thought are distorted by politics, by nationalist tendencies, and by a new pseudo-scientific religion of environmentalism and so-called "global warming" (now being re-spun as "climate change" since from the day of the Kyoto Treaty, the global temperatures have actually cooled ...);
e) supply and demand are both heavily skewed by outrageously high taxes (especially in Western Europe), myriad regulations and other market-distorting instruments.

So yes, there might be a few tweaks that could be effected by reviewing some of the excesses of speculation, unless one takes a holistic approach to all of the above (and other) market distortions, this will be a mere feel-good spit into the (rising?) ocean ...

That said, I signed the petition, if only to encourage some further industry-wide actions.

Canarsie

This is a very good point with which I agree.