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Friday, July 18, 2008

The Flipside of Regulating Oil Speculators

When I presented my plan for bringing down the price of oil, I included ways to curb oil speculation among a larger plan. I firmly believe that regulating oil speculators would bring down the price of oil. I am still not convinced that regulating speculators is necessarily a good idea.

Here are the two most obvious regulations. First, Congress can regulate the oil futures require a larger margin. Currently, the margin is only 5%. That means that someone could buy $100,000 worth of oil futures and only put down $5,000. This tiny margin invites speculators. The second is the requirement of delivery of the oil futures that are being bought. In other words, if you buy oil futures you actually have to hold onto the barrels of oil you are buying. Most speculators have no intention of actually holding onto the physical oil. They just see oil futures as an opportunity to make a quick buck. Forcing delivery would stunt speculation.

While these are all good ways to curb, regulations on oil speculators carry with it the same pitfalls as any other speculations. Once the players in any market feel their business is being impeded by too many regulations, they simply move their business where such cumbersome regulations are not in place. Right now, both New York and Chicago hold markets for oil futures trading. If Congress begins to set up all sorts of new regulations for oil trading, the potential effect is that another city, outside the U.S., tries to woo oil traders out of the U.S. and to their country. While in the U.S. we see oil speculators as contributing to the problem, there are plenty of countries in the world that see it as contributing to the solution.

Not only could the result of oil speculation regulations be a move of oil trading to a place like London but many places in the Middle East. I have no use for oil speculators. That said, I have even less use for legislation that is purely political. Polls are overwhelming and bi partisan in favor of more regulations toward speculators. Thus, I am afraid that is the sort of proposals we have now. Right now, Congress is mulling ways in which oil speculation is ended entirely.

Close loopholes on foreign oil trading. Limit hedge funds from pouring money into the market. End oil speculation altogether.

Congress is vowing to take actions that it believes will reverse runaway crude and gasoline prices. Oil rose above $136 a barrel on Monday - more than double what it cost a year ago - and gas hovered around $4.07 a gallon.

Lawmakers have introduced nine different bills on speculation - not to mention many more that tackle other causes of escalating fuel and oil prices. Several of the speculation measures have bipartisan support. No fewer than four separate hearings have been scheduled for this week, including a House hearing held Monday exploring foreign trade regulation.

The problem is that many of these regulations won't end oil speculation, just end it in the states. What this will do is provide an unfriendly atmosphere not merely for trading oil but for doing business here. Congress has no power over oil speculation done outside our country.

Furthermore, regulating oil speculators will also place undue burdens on those that purchase oil futures for legitimate hedges. By increasing the margin, it will make it that much more difficult for those with legitimate hedges to buy oil futures along with speculators.

Finally, oil speculators aren't necessarily in the business of driving up oil. They are in the business of making money. The same speculators that have been driving oil up can just as easily flip around began playing the other side and drive the market down when they see that as an opportunity. Removing them from the market maybe good when they are driving prices up but they will also not be there to drive it down.

I am always hesitant to propose any new regulations because almost always they are punitive and serve only to stunt business. I am afraid that this mad rush for bi partisan attacks on speculators may have that effect.

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