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Airlines battling oil speculation

ATLANTA — Although planes take off and land round-the-clock at Atlanta's bustling airfield, Paul Jacobson isn't focused on flying, but rather on how much it costs to fly. As the senior vice president of finance for Delta Air Lines, he must navigate volatile fuel costs, which he thinks oil speculators are driving to punishing levels.

During peacetime, Delta is the world's largest consumer of jet fuel, edging out the Defense Department. So even a small move in oil prices has an impact on the bottom line of a company that flies at least 700 of its own large and regional airplanes and counts more than 1,400 aircraft under its companywide umbrella.

Delta and the Air Transport Association, the lobby for airlines, have been out in front among 98 companies and trade groups that banded together to create the Stop Oil Speculation Now coalition. It's pushing for curbs on financial players in the oil markets, which they believe are pushing fuel prices high to profit from trading.

For most of the past 30 years, end users of oil — such as airlines, oil refiners and trucking companies — traditionally composed 70 percent of the market.

Today, financial players with no intent of ever using a barrel of oil make up 70 to 80 percent of the market in any given week.

Airlines argue that huge investment inflows from pension fund investors and Wall Street firms into the oil markets are driving volatility in world oil prices and distorting the price of crude oil and jet fuel.

Critics contend that the huge inflow of investment money into oil amounts to a self-fulfilling prophecy, with investors betting that prices in the future will go higher, thus driving them up. Wall Street investment banks touted commodities over the past decade as a way to reduce risk and enhance earnings, since commodity prices often moved in the opposite direction of stock prices.

"Given how much trading there is today in commodities, it warrants as much attention and scrutiny as the stock market gets, and deserves some checks on the power of any individual player so as not to unduly influence" pricing in oil markets, said John Heimlich, the Air Transport Association's chief economist.

At any point in time, Delta is hedging about 50 percent of its fuel costs. It does so through purchasing contracts for future delivery of oil, called futures contracts. It also does so by entering into private bets with Wall Street banks and other players in the unregulated over-the-counter market, sometimes called the swaps or derivatives market.

'Price discovery'

Futures markets are designed to bring together buyers and sellers, and through a process called "price discovery" they reach rational, mutually acceptable prices for the underlying commodity, in this case crude oil.

Since 2000, and especially since 2007, big institutional investors such as pension funds and commodity-investment funds have flooded into the commodities markets, taking positions in everything from coffee to crude.

This has led some analysts to argue that these financial players distort the price discovery process in the futures market and raise the price of oil.

Oil historian Daniel Yergin has coined the term "financialization" of oil prices. In recent months, as investors fretted over whether Greece would default on its bonds, the United States would raise its debt ceiling and China would lose control of inflation, they flocked to oil futures to diversify their investment base.

"It's almost like oil is now the holy grail financial vehicle proxy for the future," Heimlich observed. "If you are bullish on oil, buy Exxon Mobil stock. … You can hedge currencies, play the gold market. But oil has become the choice, the vehicle."

Airlines battling oil speculation 08/19/11 [Last modified: Friday, August 19, 2011 8:17pm]
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