OAG Travel News

The U.S. Air Transport Association last week launched a Web site campaign, StopOilSpeculationNow.com, in partnership with the Regional Airline Association, the Air Line Pilots Association and a host of other airline and transportation industry groups. The campaign aims to solicit public and congressional support to regulate the commodities market to prevent speculative institutional investors — pension, index and hedge funds and investment banks — from buying and selling large numbers of oil contracts.

As part of the outreach program, the CEOs of several U.S. carriers sent letters last week to frequent flyers imploring them to write Congress to crack down on speculators. "A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade, and consumers pay the final tab," the letter said.

Sen. Byron Dorgan (D-N.D.) has introduced legislation that would order the Commodities Futures Trading Commission to put an end to excessive speculation in the oil markets (DAILY, July 11).

"Oil has become a financial instrument," ATA President James May told reporters on Friday. Speculative investors are eclipsing oil consumers on the oil markets, May explained. This is driving the price of a barrel of oil up by anywhere between "$20 and $60 per barrel," May noted, citing industry experts.

"If Congress would pass meaningful speculation reform, oil prices would drop significantly within a matter of days or weeks," said Michael Masters, founder of Masters Capital Management, who also spoke at the meeting.

The cost of extraction of a barrel of oil is between $65 and $75, May and Masters noted, and much of the difference between that cost and the $140-plus that oil is selling for now is due to speculation. But when asked for a precise percentage of the difference due to speculation, Masters said, "Nobody really knows."

Economists say speculation plays only a little role in the price of oil. "Trying to pin down an exact number for how much of the price of oil is due to speculation involves a lot of speculation," said Adam Sieminski, chief energy economist for Deutsche Bank. Tight supplies and ever-increasing demand — economic fundamentals — are the primary reason behind the stratospheric price of oil, he said.

OPEC and non-OPEC production is down. "OPEC cut production in 2007 because it overestimated non-OPEC production," Sieminski said, adding that oil production in Russia is down 500,000 barrels per day from last year's forecast.

Geopolitics also plays a role. "Resource nationalism" and political tensions in Nigeria, Venezuela, Iran and even Mexico are further constraining supply, Sieminski said.

Demand in China and other large developing economies continues to grow beyond all forecasts, Sieminski said. Many countries in Asia and the Middle East also are facing an electricity shortage, and these regions are turning to oil-fired generators to make up the shortfall. This is adding to already torrid demand, he said.

Given this, going after speculative investors makes little sense. "Blaming speculators is convenient," Sieminski said. "Politicians are looking for someone to blame."

Sieminski's views mesh with those of the International Energy Agency, the energy watchdog for the Organization for Economic Cooperation and Development. In its Medium-Term Oil Market Report, the IEA said it is "a case of political expediency" to blame speculators for the run-up in oil prices.

Source: Madhu Unnikrishnan/Aviation Daily