Wednesday, June 25, 2008

Can We Curb Oil Speculators? Perhaps Not.

Congress is currently holding hearings on the price of oil, and they are hearing testimony that speculation (purchase of oil futures contracts by investors betting on a price rise, rather than by those who actually take delivery of oil) is driving up prices.

Some legislators are pushing the idea that by increasing margin requirements for speculators at the Commodities Futures Trading Commission (in Chicago), and identifying purchases and sales by speculators rather than industrial buyers and sellers, speculative activity can be reduced. The hope is that this will cause oil prices to fall to about $65-80 per barrell.

I disagree. This idea is wrong for two reasons. First, there is more than one market for oil futures. If the CFTC is tightened, then another market in another country will become the market of choice for speculators and there will be no drop in oil speculation. Second, the current high price of oil is driven by two factors - threats to production/distribution by terrorists, natural disasters, or unstable nations, and by burgeoning consumption in developing nations, chiefly India and China. These factors are real, and some people are willing to risk huge sums betting on either higher demand or curtailed production in the future. And yes, we are grievously affected and will be until the oil market becomes less risky.

Congress can do a lot, but it cannot repeal the law of suppy and demand. Wishful thinking!


Ron Davison said...

This desire to do away with supply and demand makes me nervous. I don't know enough about this to have reached a conclusion, so can't really say. But it does seem like market forces can only be gamed for so long before speculators get burned (witness the stock market of 1999 and the housing market of 2008). I guess the question is whether the markets have to create so much grief before they settle down.

ThomasLB said...

The way I see it, speculators are kind of like ticket scalpers: a parasitic group who have weaseled their way in between the seller and consumer, serve no useful purpose, and siphon off money they are not entitled to.

Surely we can come up with a way to eliminate them that doesn't interfere with supply and demand.