It’s probably pretty obvious that as an aviation business we follow fuel prices very closely here at FlyMiwok – fuel prices have a direct impact on our operator’s bottom line, and therefore on our own as well. So I’ve been following with great interest the new ideas coming out of the Commodity Futures Trading Commission (CFTC).
Some of the ideas – specifically regarding transparency – are well overdue. However, the CFTC is also looking at setting new limits on oil speculation, and that’s where things become tricky.
Exactly a year ago (July 2008), the CFTC issued a report saying that speculators had basically nothing to do with the with the run-up in oil prices, but now it appears that these “evil speculators” are back in the cross-hairs of public opinion. Neither position is probably true – while there can be no doubt that speculators did in fact play a role in last year’s oil bubble, they are not to blame for all the ills of commodities trading. And if you’re as concerned with oil prices as we are – realism counts.
Last year’s report stated thusly:
“The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market –as measured by the number of contracts outstanding, trading activity, and the number of traders– has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”
Well, then.. That settles it..
Clearly “real” demand was never close to the “speculated” demand during last year’s run-up to $147/barrel, and now as oil prices have more or less stabilized around the $60/barrel mark, we know that speculation played a role in the collapse of oil prices in December and March down to $34/barrel.
Regulating speculation needs to be done “just right” and that’s very hard to do. It should be recognized that speculators play an extremely important role in providing market liquidity – which our economy needs desperately – and also provide some indication of possible future trends in the economy. We need to see more details about the new CTFC plan – which is going to undergo a review process in July-August – but simply putting arbitrary limits on speculators can cause more harm than good and be just as misleading as last years ostrich-type approach.
The CFTC’s role is very complex on many levels, but we hope that whatever comes out of the CFTC this time around is more realistic and truly aimed at managing transparency in commodities trading. Transparency in the best weapon against any bubble; thus, any regulation should start there.
We at FlyMiwok and many other businesses who are directly affected by oil price volatility need a more robust energy market, but this has to be done without hurting the overall economy. This is a tightrope that we hope the CFTC and its new Chairman Gary Gensler can navigate successfully.
Gad Barnea, CEO, FlyMiwok Inc.
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