Open Letter to All Airline Customers and SWA

[bugchaser]

Southwest's fuel hedges are a classic example of the effective and traditional role of speculation

Sorry, wrong again!!!

How hard is it for some of you to get that what SW does is not and never will be speculation. What they do is to manage risk in the market. To not have any hedge positions and be a purely cash buyer would be the ultimate form of speculation.

What is needed is not a ban on speculation, but some limits put in place to stop the big hedge funds, pension plans, etc. from dumping huge amounts of dollars into the commodity markets as a kind of hedge against the weak dollar. If all speculation was stopped, there would be no ability for end users and producers to use the markets as intended to smooth out prices. This is not only a problem in energy markets. Other commodity users are suffering as well. The real problem that most politicians don't talk about is the weak dollar. With a strong dollar, there would be less incentive for investors to put money into the commodity markets.

 

[ASADFW7]

I am sorry that oil prices are not high because of SWA hedging. They are a small company. They only fly about 8 to 9 percent of domestic traffic.

 

[Freeze_gopher]

Sorry, wrong again!!!

How hard is it for some of you to get that what SW does is not and never will be speculation. What they do is to manage risk in the market. To not have any hedge positions and be a purely cash buyer would be the ultimate form of speculation.

What is needed is not a ban on speculation, but some limits put in place to stop the big hedge funds, pension plans, etc. from dumping huge amounts of dollars into the commodity markets as a kind of hedge against the weak dollar. If all speculation was stopped, there would be no ability for end users and producers to use the markets as intended to smooth out prices. This is not only a problem in energy markets. Other commodity users are suffering as well. The real problem that most politicians don't talk about is the weak dollar. With a strong dollar, there would be less incentive for investors to put money into the commodity markets.

Who do you think speculators are? Everybody that needs to buy large amounts of a raw material for end use are speculators. That is why these markets exist in the first place. All Airlines, large trucking concerns, refineries, or anyone else that uses that much of a commodity to make their business go are speculators. They are trying to mitigate price and quantify their costs in advance. The producer wants to know in advance that his product will be consumed at an acceptable price. The role that investment firms play is not the sole source of speculation.
Did you read my last two posts? No one is talking about ending speculation, it is a very valuable tool. Hence my comment that speculation isn't even what we are talking about.
We are talking about manipulation. You are quite correct that regulation is necessary, but even at that we still are not talking about traditional markets (NYMEX etc). We are talking about the Commodities Futures Modenization Act and the Emergence of the Intercontinetal Exchange.
The movement of money managers into commodities markets to hedge against inflation risk is a valid business strategy and is nothing new. But again that is not what we are discussing. The Intercontinental Exchange has no transparency, very few regulations (it has been nick named the wild west by Wall Street). Again Speculation is not the issue, manipulation is.
Sorry, I am not wrong. Please, go back read the posts that I made previously, and honestly try and answer the questions that I have posed. If you need info about supply and demand or the role of the dollar with regard to oil prices just ask, I'll be glad to point some things out.

 

[bugchaser]

Hey frozen gopher, until you understand what speculators are, we have nothing to talk about. End users and producers are not speculators. Nothing speculative at all about setting a hedge to lock in a price. You know what price you will pay no matter what happens to the underlying commodities cash price. Going long or short the commodity is speculating that the price will go up or down. Hedgers do not care if the cash price goes up or down. They are not speculators!! I spent a few years in the commodities industry and don't think I have forgotten it all. If you need some help comprehending any of this let me know.

 

[waveflyer]

well said-- freeze gopher-- youre getting caught up in rhetoric that 'sounds' true. The speculators are a big percentage of the problem. Regulation isn't there to do away w/ a free market-- but to make sure that the market exists w/o corruption. It's part of the balance. But maybe you all have grandmothers/grandfathers that didn't grow up in the depression or didn't share w/ you the causes of that.

Anyone else see this commercial? I saw the one post on him, but what do ya'll think?
http://www.youtube.com/watch?v=R2bOug1d20c


here's an article on it:

ENERGY: Oilman pitches wind power
T. Boone Pickens is putting big money behind his plan to cut crude oil imports.

By Andy Vuong
Denver Post
Published on: 07/12/08
Denver —- Legendary Texas oilman T. Boone Pickens compares America's reliance on foreign oil to a drug addiction and believes the cure will come in the form of wind farms and natural-gas-powered vehicles.
In Denver on Thursday to speak at an energy conference, Pickens detailed his plan to cut the country's oil imports by at least a third in 10 years.

He proposes a massive increase in electricity produced from wind farms, building enough to supply 20 percent of the nation's electricity and replace natural gas as a primary generating source. Natural gas would instead be used as a transportation fuel, cutting demand for gasoline.
The lofty plan faces several obstacles, including the lack of transmission lines for new wind power and the availability of natural gas vehicles and commercial stations to fuel them in the United States.
But Pickens, worth an estimated $3 billion, has pledged $58 million to promote the plan through 2008.
"The thing that has not happened in this country is we have not been pressed to do anything," said Pickens, 80, in an interview. "The reason we haven't is there's always been cheap oil."
With the price of oil hitting $147 a barrel Friday and possibly on target to hit $200 next year, he said the time has come to make a move.
Pickens is in the midst of a nationwide media blitz to promote his plan. The renowned corporate raider, who plans to build a 4,000-megawatt wind farm in Texas at a cost of up to $12 billion, said he didn't hatch the Pickens Plan for profit.
"I've got enough money," he said. "I don't need to make any more money, but I don't go into things to lose money."
He said the plan could cut the amount the country spends annually on foreign oil from $700 billion to $400 billion.
George Douglas, a spokesman for the National Renewable Energy Laboratory in Golden, Colo., said Pickens' plan is "not impossible" but has to overcome several challenges. "The big challenge is manufacturing," Douglas said. "We don't have the manufacturing capacity in the country to build that many wind turbines."
Douglas said the proposal also needs transmission lines to carry power from wind farms, generally built in desolate areas, into neighborhoods.
The Department of Energy released a report in May that said the nation could reach 20 percent wind energy by 2030. Pickens wants to reach that goal before 2020 by adding 200,000 megawatts of wind power. At the end of 2007, the U.S. had 16,818 megawatts of wind capacity, according to the American Wind Energy Association. One megawatt can power 300 homes.
Pickens spokesman Jay Rosser noted that even though there are only 140,000 natural gas vehicles in America, 8 million exist worldwide.

 

[Freeze_gopher]

I don't agree, that is not where these markets began. Hedging a price in advance doesn't matter to an airline if the price goes down? Did you in your time in the pit ever see a futures contract purchased by or for someone who intended to take delivery? Of course you did. Taking delivery, mitigating price is the purpose of these markets, they weren't started to give Goldman Sachs a personal playground. They don't exist so that someone who is not at all involved in that market, i.e. has no stake (no intention to take delivery) in the market at all can short a future. Just because the current understanding of a word is one thing does not mean it is correct. Shall we debate the meaning of the word "is"?
I asked you to go back and answer the questions that I asked in previous posts. Don't derail the discussion with an inane red herring. What have been the effects of the Commodities Futures Modernization act? Why does the Intercontinental Exchange exist? Who trades there and why do they not trade on the NYMEX? I spent a lot of time working in money management, so you being a pro should be able to give me a thorough explanation of the reasons why the price is so high. Show me supply and demand numbers (don't say the Chinese and Indians are burning a lot... they just met with a multitude of other countries to diminish their demand. Plus the EIA numbers do not back up a shortage, they show a very definite surplus.), and show me where the weak dollar is responsible for price. How does the weak dollar effect the price of oil? No platitudes just answer the question.

 

[Freeze_gopher]

well said-- freeze gopher-- youre getting caught up in rhetoric that 'sounds' true. The speculators are a big percentage of the problem. Regulation isn't there to do away w/ a free market-- but to make sure that the market exists w/o corruption. It's part of the balance. But maybe you all have grandmothers/grandfathers that didn't grow up in the depression or didn't share w/ you the causes of that.

Anyone else see this commercial? I saw the one post on him, but what do ya'll think?
http://www.youtube.com/watch?v=R2bOug1d20c


here's an article on it:

ENERGY: Oilman pitches wind power
T. Boone Pickens is putting big money behind his plan to cut crude oil imports.

By Andy Vuong
Denver Post
Published on: 07/12/08
Denver —- Legendary Texas oilman T. Boone Pickens compares America's reliance on foreign oil to a drug addiction and believes the cure will come in the form of wind farms and natural-gas-powered vehicles.
In Denver on Thursday to speak at an energy conference, Pickens detailed his plan to cut the country's oil imports by at least a third in 10 years.

He proposes a massive increase in electricity produced from wind farms, building enough to supply 20 percent of the nation's electricity and replace natural gas as a primary generating source. Natural gas would instead be used as a transportation fuel, cutting demand for gasoline.
The lofty plan faces several obstacles, including the lack of transmission lines for new wind power and the availability of natural gas vehicles and commercial stations to fuel them in the United States.
But Pickens, worth an estimated $3 billion, has pledged $58 million to promote the plan through 2008.
"The thing that has not happened in this country is we have not been pressed to do anything," said Pickens, 80, in an interview. "The reason we haven't is there's always been cheap oil."
With the price of oil hitting $147 a barrel Friday and possibly on target to hit $200 next year, he said the time has come to make a move.
Pickens is in the midst of a nationwide media blitz to promote his plan. The renowned corporate raider, who plans to build a 4,000-megawatt wind farm in Texas at a cost of up to $12 billion, said he didn't hatch the Pickens Plan for profit.
"I've got enough money," he said. "I don't need to make any more money, but I don't go into things to lose money."
He said the plan could cut the amount the country spends annually on foreign oil from $700 billion to $400 billion.
George Douglas, a spokesman for the National Renewable Energy Laboratory in Golden, Colo., said Pickens' plan is "not impossible" but has to overcome several challenges. "The big challenge is manufacturing," Douglas said. "We don't have the manufacturing capacity in the country to build that many wind turbines."
Douglas said the proposal also needs transmission lines to carry power from wind farms, generally built in desolate areas, into neighborhoods.
The Department of Energy released a report in May that said the nation could reach 20 percent wind energy by 2030. Pickens wants to reach that goal before 2020 by adding 200,000 megawatts of wind power. At the end of 2007, the U.S. had 16,818 megawatts of wind capacity, according to the American Wind Energy Association. One megawatt can power 300 homes.
Pickens spokesman Jay Rosser noted that even though there are only 140,000 natural gas vehicles in America, 8 million exist worldwide.

I keep hoping that everyone will see that speculation has nothing to do with this discussion (no matter your definition of the word). It is unregulated manipulation pure and simple. With the lack of transparency comes exploitation.
I liked how you eluded to the crash of 1929, well said.

 

[waveflyer]

i misunderstood you Freeze-- my fault

 

[PHXFLYR]

Very interesting since SWA has all but destroyed the rest of the airline industry since 911 with their fuel hedging program.

It’s been the key to their success. I wonder what their motive is??

AA767AV8TOR

World domination ??


PHXFLYR

 

[Freeze_gopher]

i misunderstood you Freeze-- my fault

No sweat, I knew what you were saying.
Your post brought up one of the biggest issue that honest discussions like this run into. Rhetoric: quick, cheap, finger pointing, labeling, ill informed, irrational, unreasonable, petty, biased, misleading arguments. (Whoa! I felt like Clark Griswald there for a minute)

Rhetoric is clouding and choking open discourse to death.

 

[Freeze_gopher]

Hey frozen gopher, until you understand what speculators are, we have nothing to talk about. End users and producers are not speculators. Nothing speculative at all about setting a hedge to lock in a price. You know what price you will pay no matter what happens to the underlying commodities cash price. Going long or short the commodity is speculating that the price will go up or down. Hedgers do not care if the cash price goes up or down. They are not speculators!! I spent a few years in the commodities industry and don't think I have forgotten it all. If you need some help comprehending any of this let me know.

If Airlines are not speculators, what's a Jet Fuel Forward contract? Could it be a cross commodities contract? How about a Stacked Forward Contract? What about that neat Commodities Swap Contract? You should probably tell the guys that work for Southwest that do nothing but speculate on oil prices that they really don't exist.

 

[CaptJax]

Commodities Speculators' Impact On Oil Prices

[FONT=arial,helvetica]Dear Jack,
[FONT=verdana,geneva]On several occasions in the past few months, I have written about the impact of skyrocketing fuel prices on airline customers – in their daily lives and when they travel (Final Approach May 1 and Final Approach May 28 ). In the long run, to lower oil prices for all Americans, we need to increase domestic supply, increase exploration, alternative energy sources and conservation. However, one near-term solution to the problem is for government to investigate and rein in oil speculators.

What is the Commodities Market? – Commodities are raw materials purchased by manufacturers of finished products such as food manufacturers, oil refiners or builders. Businesses that are highly dependent on oil – refineries, heating oil dealers, airlines and trucking companies among others – lessen their risk of significant price fluctuations by purchasing future delivery contracts at predetermined prices in what is known as the commodities or futures markets. The two largest U.S. commodities markets or futures exchanges are the Chicago Mercantile Exchange and the New York Mercantile Exchange, where people trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity at a specified price with delivery set at a specified time in the future.

What is the Problem with Oil? – There is a significant disconnect between the paper market for oil (speculators) and the physical market for oil (consumers). In recent years, speculators have taken advantage of actual consumers of oil by bidding up the price for futures contracts. If a speculator purchases a contract for delivery of oil at a high price six or 12 months in the future but has no intention of actually taking delivery of the oil in that contract, then a physical customer who needs that oil – to deliver home heating oil, to operate trucks or airplanes, or even to process in a refinery – will be forced to pay the higher price in order to obtain the oil that is needed.

How Do They Get Away with That? – Increasingly, sophisticated institutional investors have managed to manipulate the rules and regulations governing commodities transactions through a series of exemptions and waivers, including the so-called “Enron loophole,” low margin requirements and the dodging of U.S. public disclosure requirements. These complex arrangements have a similar impact: They put people engaged in oil-related businesses at a disadvantage with those who gamble relatively small sums that the price of oil will increase out of proportion to marketplace demands. If that happens, as it has regularly over the past few years, those who need oil for their businesses pay a premium, which is passed on to you – the consumer.

What Can Government Do Now? – In the near term, Congress needs to address the impact of unchecked speculation in the commodities market.

Commodities trading is overseen by a small, but very powerful government agency known as the Commodities Futures Trading Commission (CFTC) . Congress can require the CFTC to implement a host of controls such as imposing limits on the quantity of commodities contracts speculators may purchase, closing the loopholes that allow speculators to trade exempt from any government oversight or regulation, and requiring reporting by those who are engaging in speculation.

Experts say that closing regulatory loopholes in the trading of commodity futures will result in a significant reduction in fuel prices.

What’s Next? – Congress is expected to debate some of these issues in the next few weeks and it is urgent that they hear your voice. To facilitate public participation in the debate over speculators, we have launched a broad-based coalition, S.O.S. NOW, that provides a wide array of information on speculation and its impact on the price we all pay for oil. S.O.S. NOW stands for Stop Oil Speculation Now, and we urge you to go to the Web site www.stopoilspeculationnow.com and send a message to Congress about oil speculation.[/FONT]
[FONT=verdana,geneva]Sincerely,[/FONT]

[FONT=verdana,geneva]James C. May
President and CEO
Air Transport Association

[/FONT]
[FONT=verdana,geneva]Share this important information with a friend now![/FONT]
[/FONT]

 

[bugchaser]

Again, your understanding of the definition of speculation is is not accurate. Businesses that utilize futures contracts to minimize risk and set prices in advance are not speculators. There is no speculation involved. They do this in fact so that they will not have to speculate. They want to know what their costs will be in advance. They do not want to speculate what fuel will cost them. Hence they spend lots of time and money on risk management programs. Speculation is dangerous and not a good business practice if you are a user of the commodity in question. Speculators take position in the futures or options market depending on which way they think the market will move. In the most simplistic example, a hedger will buy a long contract for the amount of a commodity that they will need to buy at a later date. This sets the price level at that time. If the prices go up, money will be made to offset the increase in the cash price. The opposite if prices decrease. The hedger has two positions, cash and futures. The speculator generally has only a position in the futures. Your lack of understanding on this issue shows that you have no grasp of even the basics of how the futures market works. There are many good textbooks on this subject. If you would like I will recommend one or two.

 

[Freeze_gopher]

Again, your understanding of the definition of speculation is is not accurate. Businesses that utilize futures contracts to minimize risk and set prices in advance are not speculators. There is no speculation involved. They do this in fact so that they will not have to speculate. They want to know what their costs will be in advance. They do not want to speculate what fuel will cost them. Hence they spend lots of time and money on risk management programs. Speculation is dangerous and not a good business practice if you are a user of the commodity in question. Speculators take position in the futures or options market depending on which way they think the market will move. In the most simplistic example, a hedger will buy a long contract for the amount of a commodity that they will need to buy at a later date. This sets the price level at that time. If the prices go up, money will be made to offset the increase in the cash price. The opposite if prices decrease. The hedger has two positions, cash and futures. The speculator generally has only a position in the futures. Your lack of understanding on this issue shows that you have no grasp of even the basics of how the futures market works. There are many good textbooks on this subject. If you would like I will recommend one or two.

Excellent post! (I don't mean that sarcastically) Point taken. The technical definition is not my point, your post implies that their is no speculation what so ever in any of these decisions. That these markets exist for the speculator, which is not true. That an end user is not concerned with price, that he simply wants to know cost in advance. That is not the case. Who is a speculator?, who is speculating?, is this speculation? We could continue to debate the meaning of the word "is", but it isn't the point and you know that.
Beyond that we are still left with the actual issue, which was never speculation, this is an interesting aside nothing more. Please address the issue we were discussing which is the manipulation of oil prices via the use of electronic OTC markets like the Intercontinental Exchange. The change to existing laws governing energy commodities futures (the Commodities Futures Modernization Act and subsequent changes allowed by the CFTC, and CFTC policy in general). Answer the questions.

I am always interested in a good read, suggest away. Please don't suggest "The speculator as hero". Everybody knows that one.

 

[(HCDAW)]

Again, your understanding of the definition of speculation is is not accurate. Businesses that utilize futures contracts to minimize risk and set prices in advance are not speculators. There is no speculation involved. They do this in fact so that they will not have to speculate. They want to know what their costs will be in advance. They do not want to speculate what fuel will cost them. Hence they spend lots of time and money on risk management programs. Speculation is dangerous and not a good business practice if you are a user of the commodity in question. Speculators take position in the futures or options market depending on which way they think the market will move. In the most simplistic example, a hedger will buy a long contract for the amount of a commodity that they will need to buy at a later date. This sets the price level at that time. If the prices go up, money will be made to offset the increase in the cash price. The opposite if prices decrease. The hedger has two positions, cash and futures. The speculator generally has only a position in the futures. Your lack of understanding on this issue shows that you have no grasp of even the basics of how the futures market works. There are many good textbooks on this subject. If you would like I will recommend one or two.

Well said.