Did Airlines Help to Stop Oil Speculation?
The January 6 ATA SmartBrief (a free newsletter that is well worth subscribing to) linked to a letter to the editor of Crain’s Chicago Business from Air Transport Association President James C. May about oil speculation. (The letter can be found here, but registration for a trial subscription is required.)
The letter was in response to the publication’s assertion that the ATA’s efforts to stop oil speculation were “unsuccessful.” While May notes that “we do not count success or failure based on a single event,” he is sure to mention that “just the threat of regulation contributed greatly to the swift drop in price, beginning well before today’s economic crisis.”
Of course, just because the ATA says that’s what happened doesn’t make it true. Click here to see a chart I made on Yahoo Finance, comparing some PowerShares funds:
- DBA tracks corn, wheat, soybeans, and sugar
- DBB follows aluminum, zinc, and copper
- DBC tracks crude oil, heating oil, gold, aluminum, corn, and wheat
- DBO follows crude oil
A look at the aforementioned chart reveals that all of these funds began to move down around the same time. Why shouldn’t the ATA take credit for the decline in the prices of agricultural commodities as well?
May also writes that “with nearly 90 organizations, concerned members of Congress and others in government supporting the call for more monitoring, speculative money started flowing rapidly out of the oil futures market.” This effect isn’t necessarily as good as May makes it sound. Speculative money leaving the market means less liquidity exists, making it harder for the market to work efficiently, potentially causing difficulty for oil traders like airlines trying to hedge fuel.
The drop in price in oil isn’t necessarily bad for all speculators, either. Those who decided to short oil did quite well. But there is one group that did not fare was well with the drop in price supposedly caused by “threat of regulation” – those members of the ATA that have lost millions in hedges.
Guest contributor Dan Webb writes the airline website Things in the Sky. You really should read it.
This article is also available from his site.
Well, I guess I should comment because these are my two areas (airlines and oil) of professional expertise.
I think the airlines’ lobbying efforts had no material impact on the price of oil. Oil, like most commodities, were in a bubble manufactured by Wall Street greed and inefficiency. The cheap dollar encouraged this trend, as money managers poured into “the church of what was working now.” Unfortunately (at least to my mind), the Bush Administration was blind to this reality during “the crisis” (how many times did the Sec. of Energy say oil was going up “because of the fundamentals”?), and the majority of Congress was no better informed.
Which is not to say the ATA’s efforts worth worthless. A lot of the stuff they were proposing — especially the limtations on speculation by non-commercial traders — would have eventually helped HAD SUCH LEGISLATION ACTUALLY BEEN PASSED. But, like most bubbles, this one imploded on its own before consensus could be reached an appropriate governmental action. I suppose you could argue with a straight face that “the threat of regulation” caused SOME traders to exit the market, but on a day-to-day basis, I saw very little evidence of this. What really caused them to exit was greed and fear: after a while, it became painfully obvious that there was plenty of supply and reduced demand, and that somebody was going to be left without a chair when the music stopped. The rapid deceleration of the world economy this fall obviously sped the collapse of the commodities bubble.
I guess I don’t blame the ATA for trying to “look good” in all this. But, really, the bubble imploded on its own before anything they did could have any impact.