We Need Tighter Laws to Control the Speculation of Oil

The price of oil continues to hit record high. Many believe the main reason for this is speculation.

The price of oil has nearly tripled since 2004. The trading in oil on the New York Mercantile Exchange also tripled since 2004. A mere coincidence? OPEC no longer controls the price of oil. Majority of the trade in oil is done in London or New York. The price of oil is now determined by Wall Street.

According to the Commodity Futures Trading Commission (CFTC) a speculator does not produce or use the commodity but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.

Speculators on the other hand blame the increased demand from China as the reason for the rise in oil prices. According to the Department of Energy, annual Chinese demand for oil has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China. With the impact of the subprime crisis on the real estate market and the downward slide of the U.S. stock markets, more money is being pumped into the futures market by investors. According to The Economist, about $260 billion has been invested into the commodity market – up nearly 20 times from what it was in 2003. It is estimated that in the commodities market, half of the bets are placed on oil. This increased investment along with a week dollar has resulted in the price of oil rising to record high. A majority of these investments are bets placed by hedge and pension funds looking out for risky but high-yielding investments. Unlike stocks where the margin requirements may be as high as 50%, for commodities, it is a 5–7%. So with $130 billion, the speculators can take positions of about $2.5 trillion.

The CFTC is no longer able to properly regulate commodity trading to prevent speculation, manipulation, or fraud because much of the trading takes place on commodity exchanges in the U.S. and abroad that are not within the CFTC’s purview.

Traders on NYMEX (New York Mercantile Exchange) are required to keep records of all trades and report large trades to the CFTC, enabling it to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation. But traders on unregulated over-the-counter electronic exchanges are not required to keep records or file any information with the CFTC as these trades are exempt from its oversight.

Merely introducing laws that would regulate the trading of future commodities in the U.S. will not help control speculation. It is possible for a person in the U.S. to trade in a key U.S. energy commodity such as oil and avoid all U.S. market regulators by routing his or her trade through an exchange located in London or any other place. The law should regulate all trading of key U.S. energy commodity – traded through an exchange in the U.S. or abroad.

2 comments to We Need Tighter Laws to Control the Speculation of Oil

  • daddysteve

    I read an interesting article recently called “Hoarding in Plain Sight” (economicpopulist.org) discussing China and India actively filling strategic oil reserves similar to the U.S. This is millions of barrels above “normal” demand and would certainly contribute something significant to spot prices. No mention in MSM though.

  • Mike

    Have them pass this bill.
    America needs a new industrial revolution like rails, bridges, tvs, cars, and product exports in the 40-60’s.

    NOT INTO DETAIL HERE, but here is a quick view…..
    Plan – open the gas and oil fields.
    1.)build oil, gas, n-clear plants like we use to do warships in record months of WWII.
    2.)high speed rails coast to coast. put Americans back to work, and reduce oil dependence as we go, stops local flights and faster times to local city to city hubs.
    3.)those oil fields and gas fields that open up. LET the US oil barons drill, BUT a proceed of those profits SHALL go towards the US alternative energy projects listed above.

    its a win win, Americans back to work, business get money, our dependence on foreign oil goes down as we use the new fast transits.

    Then as the once built, the savings AND profits dual fold can be used to push for even more green alternative energies.

    Then we back off the oil shut down the oil fields that are not needed to reduce carbon footprint.

    WE NEED THIS 10-20 year stepping stone since you can NOT pick up a home Hydrogen generator at your local Lowe’s or home depot.

    America needs a industrial revolution president again and McCain seems closer to it then Obama. We need a US era again like the great rail from coast to coast, or a gold rush, or steel revolution. We don’t need any more war presidents, need for ‘Change’ presidents which keep changing lanes and directions. WE need an Industrial revolution president! Bring back the jobs to America. since the 60’s we have taxes home grown companies right out of the USA, or taxed them out of business.

    4.) lift taxes on companies, so they can grow and become more globally competitve like Ireland did since they hung up the US taxing structure. That allows companies to have more profits to higher more people and have profrits.
    4.b) The more the grow and the more people they higher and give better benifits to, INTURN the goverment has to come up with LESS money to support the fewer unemployed people and less taxes for health care since the companies can once again give better benifits.

    Stupid windfall taxes just tax companies into a corner having less to give to their employees and profits. If the would just let compaines expand, that means they need more people to put to work.

    This retro fit of our rail system could be the ticket, electric from N-clear plants, but WE NEED this ten to 20 year stepping stone to use what is under US Soil to GET US THERE!

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