Members of the US Congress left for their August recess without passing significant energy legislation despite an aggressive campaign from the country's airline bosses, who lobbied legislators for immediate relief from soaring fuel costs, claiming they face a crisis worse than the aftermath of the September 2001 terrorist attacks.
Under pressure not only from airlines, but from constituents representing other commodity markets such as corn and wheat, members of the House and Senate did introduce their own versions of energy reform bills just before the recess. But notably absent from each offering was regulation to directly address speculative trading in oil markets, which airlines believe can drive prices per barrel up by $20 to $60.
Fuel Spending
US carriers are projected to spend $61 billion on fuel in 2008, a $20 billion rise year-over-year as estimated yields from 1 January to 22 July grew by only 7%, according to the Air Transport Association of America. Using an average price of $136 a barrel, United Airlines estimates a $3.5 billion rise this year in its fuel bill.
Attempting to use their stature to tame what they consider excessive trading by speculators, US airline executives have implored Congress to stop the price rises caused by those traders.
"Oil speculation is a tough issue for us because the lobby on the other side is Wall Street," Delta Air Lines chief executive Richard Anderson recently told employees. Anderson argues that Wall Street banks "gave us the mortgage and the credit crisis" and now they are investing in commodity markets, pouring what he estimates to be $350 billion into oil futures in the past three to four years.
During testimony to Congress in May, Michael Masters of Masters Capital Management said those new traders, dubbed index speculators, have stockpiled the equivalent of 1.1 billion barrels of petroleum through futures markets "effectively adding eight times as much oil to their own stockpile as the USA has added to the strategic petroleum reserve over the last five years".
Masters argues that institutional investors approach commodity markets with a set amount of money and no concern for price per unit. They purchase as many futures contracts as they need at whatever price is necessary to put all their money to work. "Their insensitivity to price multiplies their impact on commodity markets," says Masters.
United chief operating officer Pete McDonald estimates the number of speculators trading in fuel to have risen 71% since 2000, while ATA statistics show the average price per gallon of jet fuel in the same period soared 265% to $3.70.
But those arguments have done little to sway Congress into mandating more oversight. Commodity Futures Trading Commission chief economist Jeffrey Harris told Congress in May that the problem is supply and demand: production has been stagnant, particularly in non-OPEC countries, as "world oil consumption growth has simply outpaced non-OPEC production growth every year since 2003".
Between 2004 and 2007 global oil consumption grew by 3.9%, driven largely by emerging markets, the report says. Yet production by non-OPEC countries in the past three years has been well below rates earlier in the decade.
Unstable conditions in countries such as Nigeria, Venezuela and regions in the Middle East also play a role, says J D Foster of the Heritage Foundation, as does concern over rapid production declines in Russia and Mexico.
The 1.35 million barrels a day of spare capacity as of June, compared with an average of 3.9 barrels a day from 1996 to 2003, also "puts upward pressure on prices and leaves world oil markets vulnerable to supply disruptions", says the commission.
There are also supply issues as the decline in the foreign exchange rate of the dollar is pushing the dollar price of oil up.
Taking those and other factors into account, the commission concludes that to this point "changes in fundamental factors provide the best explanation for the recent crude oil prices increases".
Source: Flight International
