All consumers have felt the pain of high gas prices over the last few years, and understand how those prices restrict their purchases and economic decisions. For airlines, high fuel prices and dramatic price swings also pose a significant stress and make long-term planning very challenging. Fuel is often the largest and certainly the most volatile expense item for the airline industry. In today’s marketplace, the price of oil is increasingly driven by speculators, not by producers and consumers of oil.
In the last decade, the level of speculative trading in crude oil futures contracts on the New York Mercantile Exchange has risen by 600 percent. According to the Congressional Research Service, during 2008, the cost of oil doubled to more than $145 per barrel and then fell by 80 percent. In early 2011, there was a run-up of about 20 percent, sending gasoline prices to near 2008 highs. An analysis by Deutsche Bank estimates that every penny increase in jet fuel prices on an annualized basis equals additional fuel expense of $170 million for the U.S. airline industry. In turn, these costs are passed on to consumers or drive businesses into debt, or worse, bankruptcy.
Pilots have seen firsthand the destructive effect that oil speculation can have on the airline industry. Given what the airline industry already endured at the beginning of the decade, the oil speculation bubble compounded the financial woes of several airlines, forcing them to declare bankruptcy, liquidate, and lay off thousands of airline workers.
Our solution? Congress should pass S. 1598, the Anti-Excessive Speculation Act, which curbs oil speculation while allowing legitimate hedging. The legislation would effectively cap the overall level of speculation in the market at its historic 25-year average, reducing oil speculation from about 45 percent of the total market to 20 percent of the market.
To read more about this and other proposals for strengthening the airline industry, view our full white paper here.