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“Stop Oil Speculation Now” won’t make oil cheaper

July 11, 2008 by Evan Sparks

I’m going to resist the airline lobby’s link bait for their Stop Oil Speculation Now website (google it if you care), but the airline CEOs’ letter calling for passengers to lobby Congress for tighter regulation of oil futures “speculation” deserves some attention. The aviation blogosphere sees through this as the bad proposal it is (see Elliott, Snyder, PlaneBuzz, Upgrade, TJI). Indeed, economists from across the ideological spectrum — from Paul Krugman to WSJ op-ed writers — don’t blame “speculation” for the rapid run-up in oil prices. While some of the run-up looks bubblicious, for the most part, oil futures prices reflect estimates of existing and projected demand and existing and projected supply. As Craig Pirrong writes, “Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price.” Another economist whose work I follow recently wrote, “Financial markets are driving today’s prices to match expectations of tomorrow’s values.” Speculators are doing the work of price discovery.

And for crying out loud, what is with the airlines’ complaint about “speculators who trade oil on paper with no intention of ever taking delivery”? Do they really want only those who will personally use oil to buy it? What if I’m a sharp, entrepreneurial guy who can make money buying and selling oil? (I’m not.) Why should the government limit my ability to “truck and barter” in a commodity that’s otherwise freely traded? Instead of making oil cheaper, it would restrict the full measure of price information a functioning market can provide.

The challenge of leadership is running a business in hard times as well as good. As Brookings Institution economist Clifford Winston told me recently, airline profitably depends more on the handling of “shocks” than on wringing out efficiencies. The airlines’ proposal is a Band-Aid, a substitute for actually handling the shock of rising costs.

The airline CEOs call the oil market “over-heated.” What’s really over-heated is the rhetoric and reasoning of their proposal.

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Posted in Evan's Commentary | Tagged budget airlines, business, congress, energy, network airlines, regulation |

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