Blaming The Speculators Is Simply Another Type Of Denial
July 30, 2008
By Charles Cresson Wood
In a widely distributed open letter to airline customers, the top management from twelve major American airlines recently claimed that “Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices.” This email went on to request that readers go to a web site (www.stopoilspeculationnow.com), which is intended to pressure the US Congress to act now to lower oil prices by restricting speculation in the market for oil. Readers are asked to sign up, to join the campaign, and supposedly this groundswell of public support will alleviate high oil prices. There are three major erroneous assumptions associated with this approach, and these will be discussed below. I’m surprised that the top management at these airlines is so out of touch with what’s really happening in the oil market, and I wonder who it is that is feeding these top managers such misguided advice.
First of all, let’s be clear that speculators do not, in the long-term, create high oil prices. The presence of speculators may make the market more volatile, but their presence does not, and cannot, create long-term high oil prices. If speculators do create a so-called “speculative premium” that drives the price of oil up in the short-term, and if this premium is not supported by underlying market factors, the market price must soon thereafter fall back to the place where supply equals demand. The current presence of a large number of speculators in the oil market is simply a reflection of the fact that they believe there is some serious money to be made there. Their presence actually facilitates transactions and helps to distribute risk for all those who participate in the oil markets, including the airlines. Although speculators may cause short-term movements in the price of oil, they have no power to change long-term prices. In the long run, price is a function of supply and demand, and speculators do not supply or consume petroleum.
What’s really happening is that the world’s oil production capacity is now at its peak, or will soon be at its peak. The fact that supply is not keeping up with demand is reflected in the price of crude oil, which has gone up approximately 100% over the last year. In fact, the price of petroleum-based fuels in America is actually now much higher than what consumers pay at the pump. Milton R. Copulos, President of the National Defense Council Foundation, testified before the Senate Foreign Relations Committed in 2006. In that testimony, he indicated that the total true cost of a gallon of gasoline in America today is $9.53. This total is arrived at using both the nominal price charged at the pump as well as the cost of tax breaks extended to oil companies, the cost of the war in Iraq, and the like. The total true cost per gallon in 2008 is probably much higher still.
What the top managers at the airlines have apparently not yet appreciated is that they must get off of petroleum, that is if they are going to remain cost-competitive in the future. Likewise, other business firms, government agencies, and non-profit organizations must now transition to alternative fuels. There are currently eleven commercially-available alternative fuels on the market and these include electricity, bio-diesel, straight vegetable oil, bio-methane, natural gas, propane, ethanol, butanol, di-methy either, hydrogen, and synthetic liquid fuel. According to a three-year study done by the Energy Management Institute, alternative fuels are now often cost-competitive with their petroleum-based competitors. Thus cost can no longer be used as a reason not to consider the use of alternative fuels.
The second misconception found in the open letter from the airlines involves the power of Congress. Just because Congress has proposed legislation to restrict the activities of oil speculators doesn’t mean that there is any merit to this approach. Members of Congress are currently feeling a lot of pressure to “do something” about high oil prices, and this feel-good legislation is something that they can point to. The fact is that Congress has for decades lacked the political will to do anything of substance to wean America away from its “addiction to oil” (to use the words of George W. Bush). It is time to transition to alternatives, and that is why the recent conversion campaigns of Boone T. Pickens and Al Gore are getting so much press these days – they recognize the fact that we must now transition to alternatives like wind, solar, hydro, geothermal, and other renewable sources.
It doesn’t matter how many laws Congress passes about oil speculators, or any other aspect of the marketplace for oil, these actions still do nothing to modify the fundamental reality of supply and demand. There are ample supplies of renewable alternative energy out there, plus ample supplies of non-petroleum fossil fuels such as uranium and coal, so the lack of action on the part of Congress is not due to a lack of alternatives. Part of the lack of action may be due to the complexity of the situation. This complexity is reflected by the absence of a “magic bullet.” In other words, there is no single alternative fuel to which everyone can transition. In some cases, such as for a farmer working on a farm with cows, certain alternative fuels such as bio-methane will make a lot of sense, and this is in part because he can make the fuel himself. In other cases, such as for a small local delivery company in a rural town, electric vehicles may be the best way to go, and this is because the needed energy can at least in part be generated via rooftop solar panels. Each organization will need to look at the pros and cons of each of the alternatives, and then make a choice about the best fuel for them, given their unique circumstances.
The third and most important misconception behind the letter from the airlines involves self-responsibility. Seeing the world very differently than the country’s founders, many of today’s Americans have come to expect that the Federal government will take care of them. Welfare, Medicaid, and a host of other social welfare programs implicitly communicate that the government will take care of the country’s problems. This attitude is very dangerous in light of the fact that Washington is in gridlock on matters related to energy. Americans, both individuals and managers at organizations, must now take the initiative, must work on their own, as well as in collaboration with their local communities, to get us out of this energy crisis.
So, in conclusion, Americans can continue to blame others, such as the speculators, or they can face the truth of what’s happening, and get underway with the transition to alternative fuels. The sooner that we all acknowledge the reality of what’s happening in the domain of the world’s petroleum supply, the less the damage will be because people are caught unprepared. Making speculators the scapegoats, and denying the realities of the oil market, does not help the situation, it only underscores the unwillingness of those making these assertions to do anything constructive.
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Charles Cresson Wood is an alternative fuels management consultant with Post-Petroleum Transportation, in Sausalito, California. His most recent book is “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.” You can find more information about the book, or contact him, at www.kickingthegasoline.com.
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