Organizations and Markets

Airlines Go Medieval

10 July 2008 at 12:58 pm Dick Langlois 4 comments

| Dick Langlois |

Like me, you’ve probably received more than one email today from U. S. air carriers, signed by the CEOs of all the major players, blaming the increase in fuel prices on — you guessed it — speculators. They direct you to a website at which you can send a pre-fab letter to your legislator. Here’s what the site says:

The oil price bubble is unfairly taxing American families and restricting our nation’s economic potential. While everyone is aware that supply and demand constraints contribute to price increases, there’s another force at work that, like gravity, is invisible yet powerful. This force is rampant speculation.

Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets. Speculators in these markets are increasingly buying and selling commodities such as oil even though they have no intention of using the product. As unregulated speculators pocket billions of dollars at your expense, the price of commodities has increased out of proportion to marketplace demands.  

Apparently, fear of secretive foreigners plays as well in the age of The Da Vinci Code as it did in the age of da Vinci. I invite you to do what I did: use their system to send a message contrary to what the airlines wish you to say. Here is what I said. Feel free to cut and paste.

The airlines are bombarding you with letters about the depredations of speculators. Because speculation seems arcane and mysterious to those untrained in economics, it has been an easy target since ancient times. Economists understand — and I imagine the airlines actually do as well — that speculation is in fact an efficient response to uncertainty. High fuel prices result from real supply and demand shocks as well as from uncertainty about the future of oil supply and demand. That uncertainty is a real economic phenomenon, and it can’t be wished away. By asking you to “stop” speculation, the airlines are really just asking you to transfer income to them and away from others. I find it particularly ironic that among the signatories of the letter was the chairman of Southwest Airlines, which for years has successfully speculated in fuel prices. Southwest never asked you to intervene when they benefited from long-term fuel contracts at below-spot-market prices. Don’t listen to them now.

Entry filed under: - Langlois -, Law and Economics.