June 26, 2008

Oil Price Blame Game

By Ted Jackovics, Tampa Tribune, Fla.

Jun. 26--TAMPA -- The aviation industry -- in a rare challenge to a fellow private-sector enterprise -- has begun to focus on oil speculators as a chief cause of what it calls its worst-ever economic crisis.

A flurry of Capitol Hill sessions on fuel costs reflects an urgency that aviation interests say surpasses their economic concerns following the Sept. 11, 2001, terrorist attacks. Congress held its 40th hearing of the year Wednesday on the surge in oil prices, with the aviation industry chiming in on the most recent ones.

Industry advocates said they soon will make formal inquiries to the presidential candidates, U.S. Sens. John McCain and Barack Obama, to consider the impact of oil prices on airlines, the national economy and consumers, who are caught between the airlines and oil sellers as flights are cut and air fares increase.

"The airlines did not immediately catch up with the severity of this crisis, let alone Congress and the presidential candidates, so we are going to address that in our awareness program," said Kevin Mitchell, chairman of the Business Travel Coalition, a Radnor, Pa.-based advocacy group for business travelers.

The central issue regarding speculation is whether oil has evolved from a financial asset priced for its energy value to an asset traded for speculative value.

The price of oil has doubled on the international market in the past year, and demand has increased just 2 percent. That raises questions of whether U.S. and other speculators enjoy trading through foreign exchanges with no regulatory oversight, resulting in harm to the economy.

U.S. airlines are expected to lose as much as $13 billion in 2008, Victoria Day, a spokeswoman for the Washington-based Air Transport Association, said in releasing a revised forecast Tuesday.

"We are engaging in discussions with members of Congress to understand the situation first and to close oil pricing loopholes," Day said.

Although there is no consensus on what effect oil speculation might have on the recent international run-up in oil prices, the apparent disconnect between the 2 percent increase in global oil demand and 100 percent increase in prices has shunted issues such as control by the Organization of Petroleum Exporting Countries and growth in China and India to the background.

Some elected officials have concluded that the dramatic rise in oil prices in the past year has resulted from speculators gaining control of the energy market.

Between Sept. 20, 2003, and May 6, 2008, oil futures trading increased from 714,000 contracts to more than 3 million contracts. That represents a 425 percent increase in oil futures trading, U.S. Rep. Bart Stupak, D-Mich, said last week.

Hedges that airlines such as Southwest and other businesses use to ensure a stable price for fuel in future months accounted for 63 percent of the futures market in 2000, compared with 37 percent by speculators, Stupak said at a news conference. By April 2008, speculators were in control of 71 percent of the oil futures market compared with 29 percent by the so-called "physical hedgers" by airlines and others, Stupak said.

The presidential candidates have commented on the oil price crisis in general, without getting into details on aviation issues.

In a speech in Houston on June 17, McCain said that when enough speculators bet on the rising price of oil, it can cause prices to keep rising.

"And while a few reckless speculators are counting their paper profits, most Americans are coming up on the short end," McCain said.

On Sunday, Obama said a vibrant oil futures market can help producers and buyers hedge against swings in the price of oil. But an absence of common-sense rules allows a few energy lobbyists and speculators to undermine the public confidence in the integrity of the market, Obama said.

He called for the closing of the so-called Enron loophole, a legal position the failed company requested in 2000 that exempts some energy commodities from government oversight.

On the other side of the speculator issue are officials with the U.S. Commodities and Futures Trading Commission, which Congress created in 1974 to regulate commodity futures and option markets. They contend the data from Stupak and others is incorrect, and they plan to submit a report to Congress in September.

In addition, members of the New York Mercantile Exchange and the London-based InterContinental Exchange oppose congressional action on the futures market, contending it could harm business while failing to lower prices.

Daniel Yergin, chairman of Cambridge Energy Research Associates, told Congress on Wednesday that speculative factors have played a role in driving up oil prices and creating fear about tightening supplies, but emphasized the credit crisis and weak dollar have played roles in fuel price trends.

Airline officials, however, remain steadfast in support of action, not simply discussion, on futures trading.

"Reform and transparency in the energy commodity futures market represents a necessary step toward bringing the price of oil in line with supply and demand," said Glenn Tilton, United Airlines chairman, president and chief executive, in support of a Senate bill that would increase transparency in Commodity Futures Trading Commission activities.

Nine aviation industry groups will convene July 9 and 10 at an Energy/Air Service Summit for discussions in Washington with lawmakers, the Federal Aviation Administration and financial analysts.

"I'm not sure just what they can accomplish," said Louis Miller, Tampa International airport's director, whose July aviation authority meeting conflicts with the gathering of aviation officials. "But I know that when 40 percent of a ticket goes to pay fuel costs, it is a big problem to aviation and the local community. Something needs to happen."

Tribune reporter Ted Jackovics can be reached at [email protected] or (813) 259-7817.


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