Airlines ask frequent fliers for help
Desperate for lower fuel prices, airlines have asked their customers to lobby Congress to rein in oil speculation. Jeremy Hobson reports.
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Kai Ryssdal: Not a week goes by when we don't get another sign of just how turbulent the airline industry is and now those airlines are literally begging for help from their customers.
Major U.S. carries have sent letters to their frequent fliers asking them to lobby Congress to crack down on speculation in the oil markets.
Marketplace's Jeremy Hobson has that story.
Jeremy Hobson: Airlines have enlisted frequent fliers to ask Congress for help before, like right after 9/11 -- and it worked. This time, they want customers to know that high ticket prices hurt them too.
Seth Kaplan: I think the airlines are trying to present the perspective that, "Hey, we're as much of a victim as you all are.
That's Seth Kaplan of Airline Weekly. He says what's odd this time is that some airlines have benefited from the very thing they're now against. Southwest locked in most of its fuel for this year at about a third of the current rate.
Kaplan: There's no more important factor in their profitability than some very well-timed hedges. That's speculation.
And it's debatable that removing speculators will be the silver bullet now. Ruchir Kadakia is with Cambridge Energy Research Associates.
Ruchir Kadakia: All it's going to do is actually just increase volatility because now you have producers and consumers trying to find a pricing mechanism and price discovery in a market with fewer participants.
Congress already has more than a dozen bills on the table to cut back on speculation.
In Washington, I'm Jeremy Hobson for Marketplace.
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From Plainfield, NJ, 08/21/2008
A Few Speculators Dominate Vast Market for Oil Trading
By David Cho
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898.html
Washington Post Staff Writer
Thursday, August 21, 2008; A01
Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.
The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.
The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.
Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.
'It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices,' said Rep. John D. Dingell (D-Mich.). He added that it was 'difficult to comprehend how the CFTC would allow a trader' to acquire such a large oil inventory 'and not scrutinize this position any sooner.'
The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.
The agency's report showed only the size of the holdings of an unnamed trader. Vitol's identity as that trader was confirmed by two industry sources with direct knowledge of the matter.
CFTC documents show Vitol was one of the most active traders of oil on NYMEX as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil -- about three times the amount the United States consumes daily. That day, the price of oil spiked $11 to settle at $138.54. Oil prices eventually peaked at $147.27 a barrel on July 11 before falling back to settle at $114.98 yesterday.
The documents do not say how much Vitol put down to acquire this position, but under NYMEX rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.
The biggest players on the commodity exchanges often operate as 'swap dealers' who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.
To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC's purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.
Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.
CFTC leaders have argued that speculators are not influencing commodities' prices. If any new information arises during the agency's examination of swap dealer activity, officials said they would report it to Congress.
'To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices,' CFTC spokesman R. David Gary said, reading a statement that had been crafted by agency officials. 'Regardless of their classification . . . the CFTC's market surveillance group scrutinizes daily the positions of all large traders, both commercial and non-commercial, to guard against market manipulation.'
Victoria Dix, a spokeswoman for Vitol, declined to answer questions. The firm, through Dix, released a statement that stated only that it had not been contacted by the CFTC about the reclassification of its business and that its trading status remained unchanged. CFTC officials said they do not typically contact firms that are reclassified.
On its Web site, the firm says it has $100 billion a year in revenue and describes its thriving global energy-trading business.
For most of the past century, regulators put limits on financial actors to prevent them from dominating commodity exchanges, which were much smaller than the bond or stock markets. Only commercial operations, such as farms, airlines, manufacturers and the middlemen that handle their trading activities, were allowed to buy nearly unlimited quantities. The goal was to allow these businesses to minimize the effect of price swings.
The first major change to this regulatory framework occurred in 1991, when Goldman Sachs, through a subsidiary called J. Aron, argued that it should be granted the same exemption given to commercial traders because its business of buying commodities on behalf of investors was similar to the middlemen who broker commodity transactions for commercial firms.
The CFTC granted this request. More exemptions soon followed, including one to the Houston-based energy trader Enron.
'When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes,' said Rep. Bart Stupak (D-Mich.) Now, he added, 'legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit.'
A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the 'Enron loophole,' saying Enron played a role in crafting it.
In the months after the act was passed, private electronic trading platforms sprang up across the country, challenging the dominance of NYMEX.
'Investment banks had been frustrated with the established exchange because they really were never able to get control of it,' said Michael Greenberger, a law professor at the University of Maryland and a former staff member at the CFTC.
The most successful of the private platforms was InterContinental Exchange, or ICE, founded by Goldman Sachs, Morgan Stanley and a few other big brokerages in 2000. ICE soon opened a trading platform in London, allowing its founders to trade vast quantities of U.S. oil overseas without being subject to regulation.
The exemptions for swap dealers and the development of overseas markets allowed big brokerages to open the door for more hedge funds, pensions and big investors to move into commodities.
In the coming years, commodity investments by funds could grow to $1 trillion, veteran hedge fund manager Michael Masters said in testimony before the Senate earlier this year. In an interview, he said this trend could raise commodity prices for everyone in the coming years and 'have catastrophic economic effects on millions of already stressed U.S. consumers.'
Meanwhile, commodities have been good business for big Wall Street brokerages. Its commodity trades helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.
'Business is lousy right now,' Bowie said of Goldman Sachs. 'Commodities and currencies are clearly the strongest business they have right now.'
In the coming months, swap dealers expect to have yet another venue for oil speculation. The CFTC has stated it would not stand in the way of trading in U.S. oil contracts overseas in Dubai. Goldman Sachs and Vitol are among the major investors in this new exchange.
Marlene Browne Chamberlin
http://www.marlenebrowne.com
From Plainfield, NJ, 07/11/2008
Dear Noel, I'll reply, briefly, by quoting the testimony of Michael G. Masters 06/23/08:
“What is clear is that the vast majority of Index Speculators do not trade based on the underlying supply and demand fundamentals of the individual physical commodities. Therefore, their trading decisions damage the price discovery function of the commodities futures markets.
View the Senate Commerce Committee's Energy Market Manipulation and Federal Enforcement Regimes Hearing from 3 June 08 (found at: http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=1c9f4e27-376a-49c8-a244-25730c4bbbe8),
From atlanta, GA, 07/11/2008
Marlene, Buying a future contract with a cash settlement doesn't affect the underlining price of the commodity that it is derived from. This is because the future contracts aren't withholding or adding supply to the market.
From Plainfield, NJ, 07/10/2008
Airlines ask frequent fliers for help
Dear Market Place:
Seth Kaplan & Ruchir Kadakia were either ignorant of the facts or purposefully misleading your audience. They should have addressed the role of "speculators" (i.e., index funds, swaps dealers, and investment banks) in the unprecedented recent rise in oil costs. While I understand there are geopolitical concerns, the dollar is weak, and India and China subsidize their oil; your guests failed to mention that the "Enron loophole" (ex Sen. Phil Gramm's handiwork (R. TX, ‘85-‘02), which became law on December 21, 2000, and the CFTC have created the circumstances for the present speculative frenzy in the energy futures market.
In 2000, physical hedgers (i.e., airlines, surface transport companies, home heating oil enterprises, and the like) comprised 63% of the crude futures market. Today, in 2008, speculators, without regulation or meaningful margin requirements (indeed, they are treated as if they were physical hedgers), comprise 71% of the crude futures market. As such, they are able to force prices up as they chase the profits to be made by trading "paper barrels of oil." In the process, the "price discovery" role that a commodities futures market has typically provided, is lost. Please, next time you address this critical issue, interview someone without a bias towards the traders who are making ridiculous amounts of money while the rest of the economy weakens, and worse.
Even Iyad Madani (Information and Culture Minister of Saudi Arabia) said the current price of oil is unjustified. Many experts have testified before Congress that the price of oil could drop to $65 immediately if only the CFTC would reign in these speculators. Mr. Lukken, a Bush appointee, refuses.
Besides, if the experts are wrong, and curbing speculative abuses doesn't reduce the price of oil; what's the harm? There is NONE. So ask yourself: who is against regulation? Answer: those who have the most to lose. For more information, please read Mr. Michael Greenberger's testimony at: http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf Finally, below, you'll find a fine editorial explaining the situation: Rein in the oil speculators, Posted by Star-Ledger editorial board July 07, 2008 10:30PM
Once petroleum futures contracts were bought and sold by people who actually used the oil. The contracts helped smooth market fluctuations and ensure a steady supply at a predictable price. In other words, they worked to increase stability in the oil market.
Today petroleum markets are a sandbox with no stability to be found. The advent of global electronic oil markets has meant huge increases in trading volume, without effective regulation and with such flimsy reporting and tracking that it is impossible to know who is gaming the system or when.
This demand for so-called "paper barrels" of oil, bought merely for quick financial speculation, has added 25 to 50 percent to the price of crude, according to numerous experts and economists.
These critics aren't populist cranks. They include oil company CEOs who agree speculation is disrupting prices in the worst way. The only ones denying the problem are the investment banks that are raking in major profits and the Bush administration.
The White House sees nothing wrong with wild price swings enriching the investment houses that brought us the subprime mortgage crisis, while average citizens not only have to worry about keeping their houses but filling their tanks to get back and forth to work.
Fortunately, Congress sees much wrong with this. That's a good thing, whether the sudden Capitol Hill interest in bringing regulatory order to oil market chaos is motivated by empathy for average Americans or, as is more likely, old-fashioned political self-interest.
Congress should take straightforward steps to ease the upward price pressure from speculation. Job one should be closing the "Enron loophole," the provision that the now-defunct energy company pushed through Capitol Hill eight years ago that eliminated most government regulation of the electronic trading of oil.
Hiring more regulators to oversee the markets is also essential. The Commodities Futures Trading Commission has fewer staffers than at any time in its 33-year history, even as activity on the markets it oversees has exploded.
Other important measures include increasing reporting requirements so regulators can ferret out manipulation and limiting the amount of investments that can be made using borrowed money via "margin" accounts.
None of these steps is radical. They are the same sort of sensible controls that brought stability to the stock market after unrestrained speculation fueled the 1929 crash. And it is important to note that much of what is being proposed for the oil markets isn't new regulation so much as re-regulation -- restoring rules that had been in place until the Enron loophole was created.
Sensible re-regulation of the oil trading markets would be the right thing to do even if the experts were wrong that speculation adds 25 to 50 percent to the price of crude. Cutting gas prices even 10 percent would be a serious boon to Americans and the economy at a time when gas is $4 a gallon and rising.
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