Posted by
Always To The Right on Thursday, July 31, 2008 1:32:11 PM
Airlines are acting like Democrats. “Miles-High Disregard”
The airlines claim that “speculators” (again, think “investors”) flood
the market, artificially escalating oil prices to unrealistic levels.
The reality is that commodities investments are not based on
finger-in-the-wind guessing; but on analyses of trends in supply and
demand. If investors see trends pointing toward increasing world demand
(skyrocketing demand from India and China) and constrained supply
(restricting exploration for American energy, limiting government
procurement of unconventional fuels from North America, and
constraining American refinery capacity), they are likely to bet on
price escalation. Conversely, an actual increase in supply would cause
prices to fall. Oil prices would drop immediately on the futures market
with the allowance of drilling in ANWR, well before any oil is
extracted. No matter what the bet, the reality is that any investor can
only buy oil futures if there is another willing to sell it. In each
circumstance that an investor bets on a price increase, there is an
investor betting on a price decrease.
Of course the truth is that investors have no inherent incentive to
push prices upward, and when an investor guesses wrong, he will lose
money. There is no greater benefit with a bet that commodity prices
will go up than a bet that they will go down. In fact, if a company
purchases the future right to buy oil at $120 a barrel and it instead
sells for $100, the option becomes worthless. Southwest Airlines, in
particular, should be very familiar with this process, as their
decision to enter into long-term fuel hedge contracts years ago enables
them to purchase oil at the equivalent of $51-a-barrel through 2009
while most of their competitors pay far more.