This has got to stop

Tonight, I and thousands of other airline customers received a most unbelievable email from the CEOs of 12 US airlines, railing against the evils of oil speculation. While this is not the first time I have received a strange, unsolicited letter from Delta’s management, this is the first time that Delta has urged me to take political action, namely by contacting my congressman to help “cool the over-heated oil market and permit the economy to prosper.”

If you’re wondering where I stand on the oil-speculation issue, I refer you to yesterday’s post. Concerning tonight’s email, which I include in full below, I am absolutely flabbergasted that 12 high-ranking American corporate executives would recommend a decidedly anti-market solution to high oil prices. Not that anyone will ever accuse the airline industry of having a sound understanding of economics, but now these perennial visitors of the nation’s bankruptcy courts are dispensing political and economic advice to Joe Sixpack. They haven’t figured out what a profitable business model looks like for their industry, and they’re desperate, but that’s no excuse to criminalize speculation in the commodities markets, specifically oil.

The most bizarre element of this email is the airline CEOs’ absolute refusal to admit the very real benefits that speculation brings to the table. The Economist addressed this in last week’s leader, stating,

“Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.”

Any bulk user of oil – or the refined petroleum products made from oil – will buy what are in effect futures in order to hedge against the natural turbulence of the commodities markets. This gives them a fixed price on a fixed amount of supply throughout the year, such that if the price of, say, jet fuel, drops beneath the price of their futures contract, they will buy off of the open market; conversely, if the price rises above that of the fixed-price contract, they will supplement open-market purchases with the pre-purchased supply at the lower fixed price. Airlines and air-freight companies have done this for years in order to better and more accurately project annual fuel expenditures. But such transactions and contracts depend upon liquidity. And that is what speculators provide. So for the airline CEOs to put forth this simplistic story of how speculation is an unqualified evil is horse manure, pure and simple.

Further, it isn’t just disingenuous for them to sound a political call to arms, but downright irresponsible.

Click on the pic file below for a slightly larger, readable file of the letter.