OLEAN -- Last week I had occasion to fly from Buffalo to Washington and back to attend a newsmaker luncheon at the National Press Club, an organization in which I have retained my longstanding membership. Same-day travel. Non-stop. Depart early morning, return in the evening. Late reservation with no discount fares available.
When I went online to buy a ticket, US Airways -- or whatever they call themselves these days -- wanted almost $1,100 for the trip to National Airport and back.
When I checked Southwest Airlines, which serves the capital area through Baltimore-Washington International (with cheap and adequately fast rail service available to the District of Columbia), that airline wanted $189 for the same trip. Take a wild guess as to which one got my business. And yes, every seat on my short flight was filled -- down and back.
Incredible. A difference of almost sixfold. One prohibitive. One reasonable. How could those ticket numbers fluctuate so wildly? While I have no definitive answers, a little research leads me to believe one of them is the equally incredible price of oil.
In the first three months of 2007, most major U.S. passenger airlines made a tidy profit. In the first three months of 2008, those same airlines lost $1.74 billion. With the cost of a barrel of crude at $135 at our press time, and rapidly rising, most of that loss can be attributed to the price of jet fuel.
In the past five years, according to the federal Energy Information Administration, the average jet fuel price growth rate in the nation was 30 percent per year. But even that figure is deceptive. From last May to this month, the increase in jet fuel prices has been 81 percent.
"Unless fuel prices rapidly retreat, it stands to reason that additional carrier bankruptcies cannot be ruled out," concluded a recent JP Morgan Securities analysis, as quoted on the excellent www.platts.com Web site, which covers such subjects.
So how can Southwest offer such reasonable fares? Why isn't it affected the same as other airlines? Because of hedging -- as in hedging your bets, or as defined in the New World Dictionary as "trying to avoid or lessening loss by making counter-balancing bets and investments."
It turns out that a few years back, some brilliant numbers-cruncher at Southwest convinced company executives that locking up immense supplies of future jet fuel oil at what seemed in those days outrageous prices would someday save the company.
That day has arrived. Jet fuel, unlike many energy sources, is not traded on an organized futures exchange, but -- as described in its latest quarterly filing to the Securities and Exchange Commission -- Southwest has put together a mixture of call options and fixed price swaps to ensure a steady jet fuel supply at $51 a barrel. Oh, how Southwest's competitors wish they had done the same.
These hedges are officially called commodity derivative positions, and Southwest has covered about 55 percent of its fuel needs for 2009 at the discount price of $63 a barrel, 30 percent for 2010, and 15 percent for 2011 and 2012. So this ticket price gap is likely to remain for years to come.
Another thing on the Platts online site caught my eye. About a year ago, the legendary billionaire American oilman T. Boone Pickens predicted -- to a chorus of scoffers -- that the price of a barrel of sweet crude oil would reach $80 by the time he was 80, a birthday that occurred last week. In reality, the 80-by-80 prediction came true 253 days before his most recent birthday.
As I write this, I recall the late singer John Denver routinely stockpiled gasoline in huge tanks on his mountain ranch -- predicting the age of shortage and routinely drawing the derisive jeers of critics and taunters. As individual motorists, wouldn't we all now gladly exchange the same jests and ripostes in order to have done the same for our automotive needs?
I recall British friends telling me decades ago to quit beefing over American gasoline prices and predicting I would one day be paying more than $4 a gallon. Well, that day is also here -- I am currently paying $4.03 a gallon for regular in these parts. Friends with diesel pickup trucks are paying more than $100 a fill-up, and those who drive 18-wheelers are shelling out about $1,200 each time they fill up the big rigs. Vacation plans are being altered. Rumors of an East Coast truckers shutdown strike by the time you read this are all over the street and Internet.
So what are the White House and Congress doing about this? Well, let's just say if we could harness all the hot air being blown about in those two venues it would provide an alternative energy source that could go a long way toward solving the problem.
Capitol Hill hearings earlier this month -- featuring the grilling of a gaggle of top Big Oil executives by posturing congressmen -- produced little but more heartburn for any thinking observer.
These were decision-makers from the five biggest national oil firms, which in 2007 made a collective and mind-boggling net profit of $123 billion. (If first quarter profit reports are accurate indicators, they are on their way to a $144 million net profit in 2008.)
Senior vice president Stephen Simon of ExxonMobil -- which last year netted $40.6 billion (the largest annual profit for a company in the entire history of the United States) -- was under questioning as to why some of that, even just a little bit, couldn't be returned to the driving consumer at the pump. He -- and other testifying Big Oil bigwigs who followed -- took the opportunity to spin some fanciful gossamer excuses.
The first howler was that the huge oil firms are already paying record taxes and need every last dollar of those immense profits to increase new source exploration and future "oil development" that will ease our energy problem. If that is so, why then has ExxonMobil used much of its record profit to buy back its own stock -- thus driving up the per share price and making shares more valuable for investors?
Another standard line was to blame it all on Congress for refusing to open the Arctic National Wildlife Refuge for drilling -- a drop-in-the-bucket move that even the oil engineers estimate wouldn't produce enough oil to have any real dramatic effect on the price at the pump.
Another rehearsed response was the notation by the oil poohbahs that their sector wasn't the only one making huge profits. Well, conceded, but they made the hugest. The others look like pikers. Big Pharma netted $48.2 billion in 2007, and the top five defense contractors, notorious for their huge payoffs, only netted $15.5 billion last year.
Why, some congressmen asked, was Big Oil so resistant toward plowing its billions into research on renewable energy? Answered ExxonMobil's Simon: "Until renewable resources become more economically competitive, the company will focus on its core oil business."
This is a bit like saying "If we had some ham, we could have some ham and eggs, if we had some eggs." The Big Oil execs claimed their companies don't set the price at the pump, the petroleum futures market does. (Sure, and the Seneca casino down the road doesn't have any say in the payout rate on the slot machines.)
Rep. John Larson, a Connecticut Democrat, called the Big Oil presentation "manipulation around greed" -- a not unfair assessment in my book.
That Big Oil claim about not setting prices may have been disingenuous, but there seems some truth in the statement about oil futures and their pricing clout. In the crap shoot that is the generally unregulated futures market, expectation does become reality, and it has been doing so for months.
On the aforementioned platts.com all-things-oil site, the blogging author of The Barrel column, Joel Hanley, noted correctly last week that "in a world where traders are seeking headlines to support the bullish numbers on the screen, it seems like the predictions themselves have a role in pushing prices higher."
When a star Goldman Sachs analyst last week predicted crude oil could reach $200 a barrel in the next six months, Hanley wrote "Juicy headlines like these, fed to consumers increasingly feeling the pinch at the filling station, serve to inflate the price even more, many think."
The Big Oil witnesses also implored Congress to continue the $18 billion-plus in price supports and tax breaks the federal government handed their industry in recent years from taxpayer funds, despite the huge profits and despite efforts by Democrats in both chambers to revoke the outrageous giveaway, or at least roll it back. You'd have thought the well-togged execs were starving subsistence farmers. Legislation to divert that substantial amount of money to renewable energy producers has twice passed the House of Representatives in recent months, but failed each time to clear the Senate.
There's a reason. According to the Center for Responsive Politics, in the last 10 election cycles (even-numbered years since 1990) Big Oil has given members of Congress and those who would be more than $216 million in campaign donations -- $162 million, or 75 percent of that amount, to Republicans. Does the baby robin spit out the worm?
And what about President Bush? Well, ahem. Despite the advice of even some of his conservative ear-holders, Dubya failed to make energy supply a priority for the first three-quarters of his reign -- finally mentioning we were "addicted to oil" in 2006, and finally calling for more alternative fuels in his 2007 State of the Union address. More recently -- a dozen days ago -- Dubya provided more riveting video news footage as he fervently asked Saudi Arabia's King Abdullah and other members of the Saud family to boost Saudi oil production and send more product to the United States. Just a sunset before approaching the royal family, he addressed Israel's Knesset in Jerusalem on the modern Jewish state's 60th birthday and heaped lavish praise upon the sworn enemy of Arab nations.
Bush called the alliance between the United States and Israel "unbreakable" and said "America is proud to be Israel's closest ally and best friend in the world." He called Israel our "strongest ally and friend in the Middle East" and said when Americans look at Israel "we see a resource more valuable than oil or gold."
Such news no longer travels by camel, and the Saudis get CNN and Al Jazeera. The royal family took him at his word on the "oil or gold" thing. The oil minister, smirking and rolling his eyeballs, turned Dubya down flat to his face -- claiming there are "no new customers" for the huge reserves Riyadh is sitting on, and thus no reason to increase production. Oh, added the royal family, and we want to buy $1.4 billion more worth of arms from you. Bush went on to lecture the Saudis -- and Egyptians at a subsequent stop on the fruitless tour -- about lack of democracy in the region.
Dubya's blunt and somewhat overdue assessments -- to their face -- of the Arabs and their way of doing things may have been courageous in terms of delivery, but it's a day light and a dollar short, and rather clumsy in terms of diplomacy and statecraft. He must have expected rejection and decided to get in his shots up close and personal. The Middle Eastern papers are still rattling away at the praise of Israel and the insulting nature of the trip.
Bottom line: Gasoline prices aren't likely to go down, or even stop rising, until the law of supply and demand kicks in, until the American driving public sheds its love affair with gas-guzzlers for hybrids, and until Congress and the White House get serious about this thing. They aren't yet.
The supply ain't going up anytime soon, so the demand has to go down. Last month, the National Highway Safety Administration proposed that Congress mandate a fleetwide average of 35.7 miles per gallon by car makers for the United States by 2015. (It is currently 27.5 mpg.) That gives the manufacturers seven years. In the European Union, the corresponding number is 44.5 mpg -- by next year. It is 52 mpg in the European Union by 2012. In China, it is 38 mpg already.
Some day soon, we have to buckle down in this country.
| Niagara Falls Reporter | www.niagarafallsreporter.com | May 27 2008 |