Congress should tread cautiously on futures

Many analysts have commended Southwest Airlines Co. for hedging its fuel prices years in advance, thus allowing it to remain profitable while the rest of the airline industry fell into or barely avoided bankruptcy.
JUN 30, 2008
By  MFXFeeder
Many analysts have commended Southwest Airlines Co. for hedging its fuel prices years in advance, thus allowing it to remain profitable while the rest of the airline industry fell into or barely avoided bankruptcy. Dallas-based Southwest bought oil futures that locked in a price but allowed it to take delivery years later. It was gambling that future prices would be higher than it was paying for the contracts. Clearly, because oil prices have risen dramatically, Southwest could, if it wished, sell the contracts at a substantial profit today, though, of course, it is taking its profit on the futures in the form of lower-priced fuel, earnings and a higher stock price than it would otherwise have. Southwest has likely bought new futures as oil prices have risen. Speculators took the other side of Southwest's contracts. They were gambling that fuel prices would be lower when the airline took delivery. If some in Congress have their way and ban institutions from in-vesting in oil futures or put other restrictions on commodity futures trading, Southwest and others will find it more difficult and more expensive to hedge their exposures. Farmers, for example, may find it harder to hedge their exposures to crop prices through the futures markets. Is this what Congress wants? Congress must move cautiously before imposing restrictions on the futures markets. It must find clear evidence that speculation is contributing significantly to the in-creased price of oil, and if it finds that evidence, it must impose the minimum level of restrictions necessary to reduce that speculation without killing the ability of industry to hedge its exposures.

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