Regulating oil speculators

Running for office? Worried about high gas prices? Need a scapegoat, someone to blame? Yes, it must be those greedy commodity traders in Chicago and New York who are running up the price of oil and making a fortune at the public’s expense. But, is that true?

Anyone looking for a headline to promote themselves is attacking the nefarious “oil speculators” these days. President Barack Obama, seeking support from American gasoline consumers - a massive constituency to be sure - recently announced his intention to impose more regulations on the futures industry. On his top-rated cable news show, The O’Reilly Factor, Bill O’Reilly has repeatedly blamed oil “speculators” for the rising price of gas at the pump and has also called for more regulation. At a Senate hearing, Washington Senator Maria Cantwell said excessive oil market speculation is behind skyrocketing prices burdening American families and businesses. But Obama and Cantwell are both up for re-election in November and O’Reilly lives off his TV ratings. With drivers increasingly irritated by each uptick in prices at the pump, the melding of these groups is a perfect storm of headlines, anger and calls for government controls. Do futures traders put up no money at all as O’Reilly has claimed? What are the facts?

Any trader who buys (takes a “long” position anticipating higher prices) or sells (takes a “short” position anticipating lower prices) must provide funds to meet margin requirements in his trading account before being able to place an electronic order. These margin requirements are mandated by the Commodity Futures Trading Commission (CFTC), set by the exchanges and enforced by the member brokerage firms. In the case of oil futures, that requirement is $6,885 of the value of the contract. For gasoline, the requirement is $9,900 per contract. Because of the volatility of oil prices and the greater risk to the trader (and, consequently, to his brokerage firm and to the exchange itself as the final guarantor of performance), the margin requirement for energy contracts is higher than for most other commodities. For example, the margin requirement for the widely held LIBOR interest rate futures contract is $574 per contract; for the Board of Trade’s popular corn contract, the margin requirement is $2,363.

Some traders argue that if margin requirements are increased, smaller traders will be driven from the market risking manipulation by well-financed large traders. Is that what Obama and O’Reilly want? It would also decrease liquidity, the lifeblood of the American futures industry. Increasing margin requirements is like increasing taxes: it makes it more expensive to do business and, therefore, impedes business. Most knowledgeable observers have been critical of O'Reilly and Obama's war on free markets. Lest we forget, for every "speculator" that paid a high price in the futures market, some other "speculator" who thought he was wrong sold it to him.