Speculating about speculation

On one of our recent programs, I spoke with Mike Joyce of OOIDA’s Washington, DC, office about speculation in the energy market.

Experts, public officials and others have serious disagreements about how much of the crude oil price is caused by speculation. But it’s certain that a good part of the price is directly rooted in market manipulation. The question is, how much.

It’s caught the attention of Congress, it’s been the subject of a hearing in the U.S. Senate, it’s on the minds of truckers across the United States.

Several truckers who have called in have suggested that we force people who buy commodities on the market to take delivery, rather than simply buying oil on paper and then selling before it even reaches our shores.

Another said, why not just eliminate the futures market altogether?

I have to admit, it’s an interesting idea … but highly unlikely to happen.

Unfortunately, the futures market is so well established in so many commodities, that I doubt we could ever dislodge it. It’s kind of like a tick that really has its head dug in.

Farmers have complained about this for years. The farmer plants the crop, weeds the crop, fertilizes the crop, raises the crop, harvests the crop … and then gets less income out of it than a trader on the futures market.

And none of those traders ever have to take possession of a single bushel of wheat or a single pork belly.

So what can we do?

For one thing, we can restrict who can trade, or the number of seats on the market. OOIDA’s Todd Spencer pointed out recently that number has increased fivefold in the past few years.

We can also increase the amount of their own money they have to spend to invest in futures.

According to Fox News and other sources I checked, if a trader wants to buy oil on margin – essentially, to buy the oil using borrowed money – that trader has to put up 5 percent to 7 percent of the total in his own money.

On the other hand, on the stock market, regulations require that the trader put up 50 percent of the cost of a stock purchase bought on margin.

That requirement was put in after the big stock market crash in 1929, because one of the many causes of the crash was the huge number of people who had bought stock on margin.

And now, look at our current situation. The price of oil – driven in part by speculation – is causing enormous harm to the economy.

Why should oil traders get by with this when stock traders have been regulated in this fashion for nearly 80 years? Why should these traders be allowed to endanger our economy the same way it was endangered 80 years ago?

We stopped this kind of irresponsible behavior before. And there’s no reason we should hesitate to stop it again.