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U.S. Urged to Rein in Oil Bettors: High Prices Due to Speculators, Congress Told

June 24, 2008

By John Welbes, Pioneer Press, St. Paul, Minn.

Jun. 24–If market fundamentals determined crude oil prices, gas would cost about half as much as it does right now, experts told Congress Monday.

To get prices back in line with reality, financial experts and industry leaders — including Northwest Airlines CEO Douglas Steenland — are urging the government to tighten up regulation of commodities markets.

Bringing fuel prices down will require a multifaceted solution, but “addressing financial speculation is the most immediate thing Congress can do,” Steenland told the U.S. House Energy and Commerce Committee.

Other experts who testified Monday labeled the rise in gas prices over the last year as completely untethered from actual changes in the market, including supply and demand.

While there’s increasing demand for oil from China and India, that is not new, said Fadel Gheit, senior oil analyst with Oppenheimer & Co., a New York-based investment firm. And the global economic slowdown has curbed that demand. A year ago, when oil prices were close to $70 a barrel, “people expected them to come down, not go up,” he said. On Monday, they hovered just shy of $137 a barrel.

The experts encouraged regulations that will lead to better disclosure of who is taking such positions, and higher margin requirements, meaning speculators would have to put down more cash up front.

The airline industry has been particularly hard hit by rising fuel prices, as eight airlines have shut down this year and two others are

in bankruptcy, Steenland said. Eagan-based Northwest saw its fuel price increase nearly 50 percent in the first quarter.

Airlines already have bumped up ticket prices and fuel surcharges many times this year, and some have tacked on fees for things such as a first checked bag or a can of soda in coach.

Yet ticket prices would have to rise about 20 percent more to cover the full fuel cost run-up that airlines have already seen, Steenland said. But the airlines are stuck, because such a move would prompt more people to avoid air travel. In the meantime, the U.S. airline industry is projected to lose more than $10 billion this year.

“An airplane seat is perishable,” Steenland said. “If the plane takes off, the seat is gone, it can’t be put back in inventory.” That inability to raise prices without losing more business is leading the airlines to cut those seats out of the equation.

This fall, Northwest will be about 9 percent smaller than it was last year, as it takes more planes and seats out of the air.

While the spike in oil prices in the last year has caused some to view the increase as a bubble, portfolio manager Michael Masters told lawmakers it’s something different because speculation is the main cause.

“It’s more like a tumor, and it grows and grows. When you discover a tumor, you take it out immediately,” Masters said.

One change Congress is trying to make is by closing the so-called “Enron loophole” that allows oil futures to be traded electronically in unregulated markets outside of the jurisdiction of U.S. regulators. Congress is poised to close that loophole once it overrides President Bush’s veto of the Farm Bill, as expected.

John Welbes can be reached at 651-228-2175.

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