In depth: Limiting Oil Speculation

When I published my post outlining how the United States could lower oil prices, one of the key items that I mentioned was to limit the amount of speculation that occurs in the oil market. Don’t get me wrong, I’m all for investment, but it is an economic necessity that we have an affordable and reliable flow of energy, and, unfortunately, the biggest roadblock to that occurring may be the energy speculators. There is very little that I agree with Democrats on, but some of them have, correctly, identified speculation as a major contributor to high energy prices. Unfortunately, they have severely missed the mark on the other factors, attempting to sue OPEC and increase taxes on energy companies, neither of which have any direct control over prices.

Both Presidential Candidates have announced plans to target speculators, which is a step in the right direction, but the failure of Congress to provide ANY legislation on the energy crisis is disturbing. Republicans have been unable to get additional drilling permitted, which is understandable, as they’re in the minority, but Democrats have a solid majority, and have STILL been unable to get legislation passed.

So how exactly do you limit speculation? There are a couple options.

1) Raise the amount of money investors have to put down: This is also called a margin, and its the amount of money that an investor is required to put down before they can buy something. Since the Great Depression, which was partially caused low margins below 20%, all stock investments have required a margin of at least 50%. Commodities generally have a margin of 10% or less. Since so little money has to be put down, there is minimal risk to the actual investor’s cash. By raising those margins to 40%, 50%, or even 75%,  you could significantly decrease the attractiveness of the commodities market – driving many investors to other areas.

2) Limit who can invest – Much of the speculation is coming from large investment companies (ex. Hedge funds), who have looked to oil as the best way to make a quick buck. With the collapse of the housing bubble and the rough economy (which is caused largely by high oil prices), professional investors have run to commodities as the new economic fad, which drives up oil prices, drives down the economy, the stock market, etc. It becomes a cycle – high oil prices hurt the economy, the dollar, and the stock market, which drives even more investors into oil and other commodities. Wash. Rinse. Repeat.

One proposal that was put forward – but later abandoned – by Sen. Lieberman would be to ban hedge funds and other large investment houses from holding oil futures. While I think this is an “if all else fails” option, the current situation justifies keeping it in consideration.

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1 Comment

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One response to “In depth: Limiting Oil Speculation

  1. Max Yakov

    Just a little ‘speculation’: Is it possible that we’re looking at a potentially sizable price bubble and nobody wants to be caught holding the ‘pin’ that burst it because of the potential
    losses oil hedgers/investors/speculators could take?

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