Speculative Oil Trading

Much is still being made of futures trading in oil as being a major culprit in the rising cost of oil. Now Congress seems to be trying to respond to these concerns with legislation.

Facing complaints from price-pinched consumers, U.S. lawmakers are targeting lax futures trading rules that some critics say have given rise to a speculative bubble in oil and other commodities.

So what is it the lawmakers want to do? Well, pander to the conspiracy theorists, apparently.

Several bills have been introduced recently aimed at tightening the rules and expanding the regulations governing futures trading.

One of the flaws in the thinking (other than the fact that there are as much or more "short contracts out there than "long" contracts, thus the market is betting that prices will probably go down) is that the U.S. Congress does not control the global investment system.

Yet proposals that make it too difficult to buy and sell commodities, particularly in the largely unregulated over-the-counter market, could backfire, some economists and analysts warn.

"These are global commodities markets. If we put on too much red tape, trading will go overseas," said James Angel, a corporate finance professor at Georgetown University's McDonough School of Business, who testified on energy prices before the late June hearing.

Investors will just go buy their futures contracts elsewhere. So this is just silly. Then there is the paradox of unintended consequences:

Regulators and lawmakers have already tightened the first two loopholes, though some say not enough. The swaps exemption, however, is wide open for bills, such as those proposed by Sen. Dianne Feinstein, D-Calif., and Sen. Ted Stevens, R-Alaska, that would extend limits on trading positions to pension funds and their broker-dealers.

So here we have a legislators limiting the ability of pension funds to make a profit on their investments, just as baby boomers are starting to retire in droves and putting strong pressure on the pension funds themselves to make a high return.

Brillant.

I guarantee that more regulation will not lower oil prices. An increase in supply and/or a drop in demand will cause prices to drop, nothing more and nothing less.