MINNEAPOLIS - Politicians and those affected by high fuel prices from Minnesota to Washington, D.C. say an arcane system of buying and selling oil futures -- without any oil actually changing hands -- has doubled prices.
High fuel prices especially hurt the traveling public, even beyond how much motorists pay at the pump.
For instance, Jefferson Lines, which provides bus service to many Upper Midwest communities, may be forced to end service to some smaller communities, the company president said Monday.
And jet fuel prices that are "out of control" threaten jobs and even some airline companies' survival, Minnesota-based Northwest Airlines' leader told a U.S. House committee.
"If the current pricing dynamic does not change, our industry will be severely challenged and will continue shrinking -- to the detriment of customers, employees and the communities we serve," Northwest head Doug Steenland said. "It is as simple and stark as that."
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The problem centers on markets established to allow companies like Jefferson and Northwest to contract for fuel months in advance so they can predict their operating costs. But those markets have been taken over by speculators, including pension funds and investment banks, that buy and sell oil futures without ever taking possession of the oil, according the Vern Kelley, a Minnesota petroleum marketer and member of the Petroleum Marketers Association of America executive board.
U.S. Sen. Amy Klobuchar, D-Minn., said stricter regulation is needed over those markets. "It's about time we had a cop on the beat."
Klobuchar said she supports efforts by U.S. Sen. Byron Dorgan, D-N.D., and others to slap rules on oil futures trading and hire investigators.
Charles Zelle, who head Jefferson Lines, said that as a third generation in the bus industry he never has seen such uncertainty in fuel prices. Diesel fuel for his buses costs twice what it did a year ago, he said.
Soaring gasoline costs have driven some motorists from cars to his buses, increasing overall ridership 15 percent. However, that mostly is between major cities, such as those providing students rides between home and college.
Small-town ridership is not rising, Zelle said, but it costs more to provide that service. Jefferson already has cut some rural lines and may be forced to make further reductions, he added.
While high fuel costs actually help Jefferson gain riders, that is not the case for airlines, Steenland told congressmen.
"I cannot overstate the importance to my company and the entire U.S. airline industry of immediate congressional action to halt excessive speculation in oil futures markets," testified Steenland, Northwest's president and chief executive officer.
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Klobuchar said that in 2000, Congress approved eliminating some energy futures regulation. That action needs to be reversed and other regulations are needed, she said.
The speculation markets artificially inflate fuel prices, she said.
"With gas prices rising so high and so fast, I join most Americans in feeling something just isn't right," Klobuchar said. "No one knows for sure what is going on in these transactions."
Kelley put it stronger: "They highjacked an industry."
"The financial health and security of the United States depends, in part, on a commodities market structure that is stable, rational and predictable," Steenland testified. "Today's energy commodities markets, however, do not display these characteristics."
In the past year, gasoline prices increased 36 percent, diesel prices are up 66 percent and crude oil prices have almost doubled.
Kelley said if speculation markets were strictly regulated, gasoline prices could drop to $2 or $2.50 a gallon.
Klobuchar said besides trading regulations, the federal government needs to look at increasing oil production in places like North Dakota.
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In his testimony, Steenland delivered a sobering warning:
"From 2002 through 2007, the price of oil increased from $26 per barrel to $72 a barrel, an average annual increase of about $10 per barrel.
"While this was not insignificant from the airlines' point of view -- a $10 increase in the price of oil adds about $420 million to Northwest's annual costs, for example -- airlines were able to adjust to the increase given the time span during which these increases took place.
"In the past 12 months, however, the price of oil has more than doubled -- it has increased about $70 a barrel.
"There is nothing that airlines can do to fully absorb this increase.
"Both the magnitude of the increase and the speed at which it has occurred are unprecedented.
"In a few short months the cost of jet fuel has turned industry profits into enormous losses and is adversely affecting the industry's liquidity."
Davis works for Forum Communications Co, which owns the Budgeteer News. E-mail him at ddavis@forumcomm.com .
