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US carriers push for regulation of speculative oil trading

US airline lobbyists expect some form of legislation to crack down on speculative trading in oil, but the effects that the potential legislation could have on record fuel costs are uncertain.

Air Transport Association of America (ATA) chief economist John Heimlich, says he is “confident that we’ll see action this year” on bills introduced in the US House and the Senate that would extend regulatory limits on oil speculation.

Airlines and others have called for an end to the so-called ‘Enron loophole’ that allows traders to cover with cash far less of their trade than is required by a stock broker in an equity or shares deal. Those carriers also seek greater transparency in speculative trades.

A number of oil traders and investment analysts have estimated at recent congressional hearings the cost of oil would drop by as much as $70 a barrel if various new regulations take effect. Congressman Bart Stupak, who has introduced legislation regarding oil trading, believes the per-barrel cost could drop to $65.

Northwest Airlines chief executive Doug Steenland, who is ATA’s chairman this year, two days ago spoke out against speculators, telling US legislators, “I cannot overstate the importance to my company and the entire US airline industry of immediate congressional action to halt excessive speculation in oil futures markets.”

But Heimlich is not prepared to blame the sharp rise in fuel prices entirely on speculators, saying “it is not the number one cause but a contributor to the run-up in fuel costs.” Estimates have ranged to as much as $60 a barrel for savings on a $130 barrel of oil if speculators were curbed, but Heimlich says, “personally I think maybe it would drop to $100 barrel”. He notes part of the success in curbing speculators is preventing prices from rising even farther.

Heimlich spoke today at the International Aviation Club, where he joined Mark Schulte, managing director of the Taurus Corporate Finance Group, an airline investor.

Schulte says that the weak dollar has made oil trading and buying easier for overseas airlines, which pay with a stronger currency such as the Euro. But “if the dollar were to appreciate, foreign carriers would feel the pain”.

Schulte explains he does not expect efforts by US airlines to raise liquidity through sales or spin-offs of wholly owned regional carriers or of frequent-flyer loyalty plans to materialize since “the viability of the core business is seen to be weak”.

As their share prices have fallen and “eliminated any value created in 2006 in anticipation of consolidation”, the US majors have a market capitalization of about $7 billion now, says Schulte. That compares to $26.5 billion for the European network carriers, and about $26.2 billion for Asian airlines.

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