The Airlines' Convenient Villain

Posted by: Justin Bachman on July 10

In times of economic stress, it’s often useful to find a scapegoat on which to heap the populace’s scorn and anger. So it is these days with the U.S. airline industry, seized by contraction and malaise, racing to outdo each other in terms of cutting flights, employees and amenities in a bid to avoid liquidation.

The new villain is the commodity speculator, who is also being castigated by Congress in recent weeks through a series of hearings. (The latest was on July 10, involving agricultural interests.) If you fly even semi-regularly, you will likely be receiving a letter signed by CEOs of a dozen large U.S. airlines asking you to petition your federal representatives for greater regulation of commodity trading. This would, in theory, curb speculation in crude oil markets and cause barrel prices to recede anywhere from $30 to $60, depending on which “expert” happens to be testifying.

There is also a related site, StopOilSpeculationNow.com, which aims to rally public opinion against oil speculation. It’s funded by the airlines, along with trade groups for truckers, cargo airlines, business travelers and petroleum sellers. The site is void of nuance, warning that “risky speculation in gas and oil markets IS HURTING OUR FAMILIES.” (Yes, the sensational emphasis on that latter phrase is theirs.) You also will find a Share Your Story section, with tales from real people suffering under high energy costs.

Here’s the highlight of the CEOs’ letter for me: a deregulated industry that regularly bashes government intervention in its business bemoaning loosening of regulation and then requesting greater oversight by Uncle Sam for another field. Classic.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

Now, of course, millions of words have been proffered in recent months by financial writers on this very topic. Some contend speculation is to blame for higher prices, others argue that fundamental supply-and-demand issues are governing crude’s escalation. In fact, BusinessWeek.com hosted such a debate between Economics Editor Peter Coy and BW columnist Ed Wallace just this week. It’s good stuff, with Ed’s piece available here, and Peter’s earlier arguments found at the link on the right side of the page. The main point in all this is, no one truly understands all the reasons spurring the long run in crude prices, and it could very well be a variety of factors working together. When you’re discussing a stew of issues like these — a vital commodity such as oil, futures markets, geopolitical tensions, investor psychology, risk, and greed, to name just a few — complexity is the central theme. That’s just how it is with a subject like the high cost of crude oil.

But the airlines, who often treat us like we’re all 5-year-olds on their planes, like to keep it very simple. If you decide to impart some or all your airline wrath from current flying conditions onto large institutional investors who see profit potential in future crude contracts, hey, all the better. For the most part, airlines already assume we’re not too bright.