Jim Letourneau's Blog

Investing, Technology, Travel, Geology, Music, Golf. I think that covers it.

Speculators in the Crosshairs

While mining companies like Barrick are hedging their energy costs by purchasing oil companies with long life reserves (Barrick just announced the purchase of Cadence Energy), the airline industry is doing what it does best - whining to the government. They are trying to enlist their customers to plead their case as well. No less than 12 airline CEOs have taken a "united" stand against oil speculators.

My letter came from US Airways:

Dear US Airways customer,

As you can read in the attached letter signed by 12 airline CEOs, US Airways and other carriers in partnership with the Air Transport Association (ATA) are joining a broad coalition of consumer and industry groups calling upon Congress to take swift action to reign in irresponsible oil speculators. We advocate putting common sense limits on unchecked oil speculation by paper traders who are running up the price, but do not intend to take possession of the oil they trade.

While the reasons for surging oil prices are complex, common sense tells us that escalating prices are more than a supply and demand issue. In the long term, we must reduce our dependence on foreign oil. The airline industry fully supports maximum efforts to increase domestic production of oil, alternative energy sources and conservation. But there is also a short term problem which has significantly impacted the price of oil.

While this is not the only solution, it is perhaps the quickest way to stop or reduce the rising price of oil. Without immediate oil speculation reform by Congress there will likely be additional service level reductions and higher airfares. We urge you to contact your representatives in Congress immediately.

Thank you for your support and business during this unprecedented time for our industry.

That was followed by

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.

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 StopOilSpeculationNow.com.

The 12 CEO signatories are using Capitol Advantage to do some ASTROTURFING (astroturfing is a manufactured grassroots campaign). They are using Capwiz·XC, an award-winning online advocacy system to deliver messages to Capitol Hill. The people at Capitol Advantage are hosting the StopOilSpeculationNow.com site as evidenced by the link that US Airways sent (this will likely be changed shortly but for the record, the link URL was http://capwiz.com/sosnow/mlm/signup/).

These spin doctors are doing a great job - for example:



  • Drive to work?

  • Buy food?

  • Take the kids to see grandma each summer?

  • Plan on heating your home this winter?

If you do any of these things, gas and oil speculation hurts you and your family.


Do I breath air? Hell Ya, they're talking about ME!

Of course Enron gets a mention as they were a bunch of shady speculators. If only the government had "done something". The site could go viral just based on the traffic generated by their massive marketing lists.

As an aside, the airlines are not above encouraging unnecessary travel through their loyalty programs, I know of a 2 instances where round trips (Vancouver-Cleveland and Calgary-Sydney, Australia) that were taken only for status maintenance purposes. When will we see a campaign to stop airline passenger status seeking?

Unfortunately the shiny new "grassroots" site will confuse some people who know that the real bad guys are the oil companies and they only path to lower prices is to not buy any gasoline from Exxon and Mobil, or not buy gas on May 19th, or only buy the gas you need, or only buy gas from companies selling American oil.

Unlike an airline flight ticket that can range in price by an order of magnitude depending on an arcane pricing system that we all try to navigate, the price of oil is still controlled by supply and demand for the most part. In other words, there is less volatility in the price of a barrel of oil than there is in the price of an airline flight ticket.

I've been saying for a few weeks now that US$150/bbl will be a tough level for the market to crack. We are due for a brief bull market correction. I also think we'll see even higher prices a year or two from now whether there are oil speculators around or not. Perhaps the airlines should follow Barrick's lead and do more strategic investing and less lobbying about something they can't control.