In an ideal world, all derivatives will be used just for hedging (e.g. the jet fuel example above), and all banks will only do pass-through trading mostly to facilitate hedging, and will take no positions in the market where they can lose money.
The above is absolutely critical for the functioning of the economy. Without it, Vanguard will lose too much money in "tracking error" and their ETF's would no longer be as close a proxy for SP500 as they are right now, airline tickets will be more expensive (airlines aren't experts in commodities and inflation hedging, so it will cost them more to do it than to use derivatives to pass it on to more sophisticated investors) etc. etc. etc. It will even impact much more obscure things like Fed's ability to infuse liquidity into the markets and hence the entire economy (I know because I am a code monkey currently working with a set of products - quite complicated derivatives - that are fed mandated and without them it will be very expensive for any bank - and hence it's clients - to manage it's counterparty risk and hence liquidity).
In reality, however, it is practically impossible to distinguish these legitimate hedging activities with a rogue trader taking prop positions aimed at juicing up his portfolio performance (and hence his bonus). It is very possible to take prop position by a trick known as "over-hedging". This is precisely what a JPMorgan trader did a few years ago, causing a $2B loss. And you only hear about the losses because they make news. I bet there are many other instances of this going on somewhere.
So, in the end, it is always a cat and mouse game between the regulators and the traders at banking institutions.