In a historic move, a dozen airlines have emailed a form letter to their frequent fliers asking them to contact Congress about our nation's oil policy. This is the first time that airlines have tried to turn their customers into a political lobbying group.
Millions of travelers received the emails yesterday. The airlines asked their customers to go to stopoilspeculationnow.com and send a form letter to lawmakers. The letter asks Congress to more tightly regulate U.S. markets for buying and selling oil futures.
Here is the backstory, with answers to key questions:
What is the core issue?
Everyone assumes that the price of oil is the result of supply and demand. And most people assume that oil has become more costly because more countries (such as China and India) have been buying oil and because no new oil fields have been found to meet demand (plus, there are continued troubles in the Middle East). But the airlines say there is more to the story. They calculate that if supply and demand was all that mattered, crude-oil prices should be about $60 per barrel. Instead, prices are roughly twice as high. The airlines think they can finger the villains responsible for the recent spurt in oil and jet fuel prices: the oil futures market.
What is the oil futures market? A "future" is essentially a contract to buy or sell a particular amount of oil on a set date in the future at a price agreed upon today. The idea is to allow companies, such as Southwest Airlines, to make a bet on the future price of oil. Let's say that Southwest locks in a cheap price today for oil that will be delivered a year from now. If in 2009 oil prices are much higher than today, the company will enjoy today's relatively bargain price for the oil it receives.
Why do the airlines think that the oil futures market isn't working properly? The airlines say that the oil futures market works fine when knowledgeable, interested parties, such as themselves, are the ones who are placing the bets. But today, they point out, a majority of the investors buying and selling in the oil futures market are speculators--people trying to profit and the market's ups and downs, not actually take possession of any oil. The airlines say that, because of the way the rules of the game are set up, these speculators have an incentive right now to drive prices up unnaturally high. For example, they say it's too easy for uninformed people to speculate in the market. To generalize broadly, the rules of the game allow you to buy futures contracts without having to put very much money up front. According to once investor, to buy 1,000 barrels of oil ($135,000) a big investor need put up only about $8,000. The airlines think that Congress should require speculators to put up more money up front, which will discourage trading.
Are speculators to blame? Nobody knows for sure, but several people are skeptical. The Princeton economist and New York Times columnist Paul Krugman doesn't think so, blaming supply and demand instead. Fortune magazine agrees. Oil company executives also agree, except that they blame government regulations and high taxes for discouraging investment in drilling for new oil gushers.
Should the airlines ask their customers to become politically activist on this issue? Sound off below.