Rant: Burn the "Speculators"!
Why are airlines sounding the alarm against one of their favorite activities?
It will not escape the notice of astute readers that heavier-than-air flight requires a fair amount of consumable energy. Fuel is a big chunk of most airlines' operating budgets. So you can't help being a tad suspicious when normally hypercompetitive airline companies suddenly join hands, form a ring around their customers, and beseech us to urge our representatives in Congress to Stop Oil Speculation Now!
"Twenty years ago," says a letter signed by dozens of airline executives and blasted into thousands of frequent flyer inboxes, "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."
Just who are these greedy paper pushers who are "hurting our families" by callously driving up oil prices and trading a barrel "20-plus times before it is delivered and used"? Well, for starters, the airlines themselves.
The letter came to me from Southwest, whose stunning success has been a staple feature story on newspaper business pages in recent years. Even as other airlines reported a collective $6 billion loss in the second quarter of 2008, Southwest floated above the fray with its 69th consecutive profitable quarter.
Southwest credits its profitability to savvy hedging against rising fuel prices. When a company hedges, it locks in a price for oil at a fixed date in the future by signing a contract today promising to buy the oil at that price no matter what happens to the market tomorrow. If prices go up, Southwest gets to buy at below-market rates. If prices go down, the airline has to pay more than its competitors for the same oil. Since 1998 the company has saved about $3.5 billion this way, a figure equal to 83 percent of its profits during that period.
"When oil got to $40 a barrel, we thought, 'Oh, wow! It's too late,' " Southwest Treasurer Scott Topping told USA Today in July. "Then it went to $60, and to $80, and then to where we are now. At each step along the way, the question 'Is this something we should continue to do?' became more and more difficult to answer. But our overall philosophy led us to keep buying hedges. It's a matter of discipline."
Southwest isn't the only airline to hedge the price of oil. Nearly all do, just not as successfully. Apparently, when airlines buy oil futures on a bet that the prices will go up, it's good business practice, but when people who don't happen to be the treasurers of airlines do the same thing, it is, to quote the Stop Oil Speculation Now! website, "rampant speculation" that "upsets the natural relationship between supply and demand."
And then there's that other greedy speculator: you. Anyone with a 401(k) or a pension probably has a portfolio containing commodities futures, which are increasingly appealing as the dollar falls and real estate staggers. Futures contracts exist for all kinds of commodities, and the logic is always the same. It's like buying stock, or even a house. You're hoping to make a smart bet on which way prices will go. It's how markets work. If there were no "speculation," you'd spend your golden years eating cat food bought with money stuffed in a mattress, and gas prices would change every time Venezuelan President Hugo Chavez managed to get hold of a microphone.
A bill that looks a lot like the airlines' list of demands is stalled in the Senate (thank you, partisan squabbling), but Congress can't prevent people from speculating on energy in London or Dubai any more than it can control the skyrocketing demand from India and China that's driving fuel price increases. Speculation will carry on, whether or not the bets are placed within our borders.
Frequent flyers are used to receiving useless spam ("Fly to Siberia via Cincinnati and Rotterdam for only $363 one way!"). The Stop Oil Speculation Now! letter deserves the same quick deletion. Come to think of it, the other spam improves by comparison. Next to the airlines' hypocritical, economically-illiterate reasoning, that Siberia itinerary almost makes sense.
Katherine Mangu-Ward (kmw@reason.com) is an associate editor of reason.