clock menu more-arrow no yes

Filed under:

War on economic speculators: Regulations should be put in place

Rep. Barney Frank, D-Mass., left, speaks  about oil speculation at a news conference with Rep. Ed Markey, D-Mass., on Capitol Hill in Washington, Wednesday, Feb. 29, 2012.
Rep. Barney Frank, D-Mass., left, speaks about oil speculation at a news conference with Rep. Ed Markey, D-Mass., on Capitol Hill in Washington, Wednesday, Feb. 29, 2012.
Jacquelyn Martin, Associated Press

Having a divided Congress can be a good thing. For example, it will keep President Obama's request for tougher penalties against oil speculators from becoming law any time soon.

At a press conference this week, neither the president nor Attorney General Eric Holder was able to articulate an example of the market manipulation they are attempting to fix through their calls for tough new regulations on speculators. But they made it clear that another $52 million for the Commodity Futures Trading Commission would do the trick.

It's natural for politicians to appear eager to do something when gas prices spike, particularly with the summer vacation season looming on the horizon and an election coming in the fall. But the war against oil speculators is misguided, taking advantage of a widespread lack of understanding about markets.

Speculators perform a vital market function in that they discover the price a commodity. They make educated guesses as to future supply and demand, inflation and other factors, such as the threat of war in the Middle East. Sometimes they push prices up; sometimes they pull them down. Their speculations help markets gauge supply and demand.

But the futures market works best when a large number of traders are involved. Unfortunately, Obama's plan would set margin requirements that would force traders to have more cash on hand before buying contracts. This would serve only to force smaller investors out of the market, leaving it dominated by the few large ones, making oil more vulnerable to the sort of deliberate manipulation the president says he is trying to fight.

The current spike in prices is the result of increased global demand, particularly in emerging markets such as China, and of brewing tensions between Iran and Israel. Removing speculators entirely from the market would not keep these factors from driving up the cost of gasoline, just as it would not keep the price of natural gas from falling as low as it currently is. Those natural gas prices are the result of new extraction methods making vast reserves accessible. Whether they drive prices up or down, speculators bring stability to markets, helping them better prepare for eventualities.

If the president truly was interested in helping consumers find cheaper supplies of energy, he would establish policies that help shift markets toward natural gas. He also would end his opposition to a Canadian oil pipeline into the United States, which would strengthen the nation's ties to its oil-rich and non-controversial trading partner to the north. Those are long-term policies that would set the nation on an eventual course toward greater security.

They would not, however, make for the kinds of strong sound bites that identify supposed wealthy enemies among us in advance of an election.