Just get the speculators out if the market, and things will sort themselves out. Mandate that all purchasers of oil or gas actually have to take delivery of the product they are buying, and watch the market calm right down.
It will calm down to nonexistence, and very bad things will happen.
Plus what you're proposing has various technical challenges.
What bad things would happen? All we are doing is cutting the guys out of the middle who do nothing but drive prices up. The people/companies who actually need to buy fuel to resell it or use it, would not be effected. Prices would stabilize dramatically.
Technical challenges? Fine them $100 for every barrel they don't take delivery of.
who do nothing but drive prices up.First of all, speculators are on both sides of the market. Some are long, others short. You can't argue that in both cases they are "driving prices up". You can say that to the extent that speculators are net long, they are driving futures prices
up in the short term. Likewise, to the extent that tehy are net short, they are driving futures prices
down in the short term.
As for whether they are ever driving prices up (or down) on a long term, structural basis, you would have to consider that in virtually all cases speculators never take delivery (or make delivery) of the oil futures they've bought (or sold). They buy a future, hold it for a bit, then get out, or possibly reverse there position. At no point do they actually have possession of any oil.
The implication of this is that the physical market is unaffected by speculators. At the end of the day, the physical crude market consists of commercial sellers (oil producers) and buyers (refiners, governments, corporations etc.). On the last day of the futures when all the speculators are forced out you're left with X amount of oil to sell and Y amount of oil to buy, and based on that and the inventory available (and a zillion other factors) you're left with some price that clears the physical market. There's no speculator in this unless you believe all hedge funds have giant oil tanks out back near the parking lot.
Can speculators affect the
futures market on a short term basis? Yes, absolutely. Especially in longer dated futures where commercial activity tends to be light. That part of the market tends to be dominated by speculative flows. However, the speculators who play in that arena tend to be much more long term in thinking (and you need to be, given the lack of liquidity in that space). They're not looking to make a quick buck the way some 25 year old crude day-trader is. They're trying to figure out how much oil or natural gas or wheat is worth in July, 2012. Its a price discovery function, and its good. However, in the medium term, near dated contracts, the effects of speculators are generally very transient.
You'll note, of course, that CFTC data show that speculators were
net short crude oil during its last hurrah up from about $125 to $147/bbl. And yet, it still kept going higher (until it didn't). Additionally, markets that have no futures activity (ie: iron ore) saw price increases wildly in excess of those seen in crude. So, the interaction of supply and demand in tightly coupled, low slack, inelastic markets can cause parabolic price rises (and declines). Who'd have thought.
people/companies who actually need to buy fuel to resell it or use it, would not be effectedFirstly, the word is "affected".
Secondly, you've introduced a funky paradox. Say I am Great Big Refinery Inc. I think I'm going to need 50000 bbls of oil to meet demand in May. So I buy those barrels to hedge my costs. Meanwhile, I sell the equivalent amount of gasoline / heating oil etc. (the output of my refining process) to hedge my revenue. Next week, sadly, my refinery lights on fire and has to be shut down for repair work. Now I've been forced to take delivery of 50000 bbls of oil that I can't use, and make delivery on 50000 bbls worth of products that I can't make.
You, Erik, might think: "Well okay, just go sell the oil futures for the part you don't need and buy back the gasoline / heating oil futures that you can't deliver to." And that's exactly how the futures market functions, today. The exchange nets people out and you don't have to show up with your oil tanker if you're net flat position wise. Unless, of course, you want me to take that oil, drive it around the block a few times, then deliver it to the next guy, and pay a $100 per contract penalty fee for having my refinery accidentally catch fire. Because that's a smart regulatory policy.
Prices would stabilize dramatically.Would they? Stable prices are a function of a market that is extremely liquid in both directions. If you kick out speculators, who is going to provide most of that liquidity? Airlines would be forced to call up their bank to hedge some of their oil exposure, and the bank wouldn't have any outlet for that risk other than desperately trying to phone up Exxon to buy some. Price stability would be a function of whether or not you could get the right buyer and right seller together on the same day. That is not a sophisticated market - its a sloppy, illiquid one with no transparency (like Real Estate, for example).
In the longer term, how would XYZ Oil Co. like it? What if they have a field which they feel confident they can get online and produce 20000 barrels a day for a decade or so, starting next year? Lets say they like prices where they are right now and would be happy to sell their oil at current futures prices. Who's going to buy it? You've kicked speculators out of the market, or forced them to take delivery of something they can't store, which amounts to the same thing.
So XYZ Oil Co. would then be forced to find another way to finance their capital expenditure. They could go to a bank and ask the bank for a loan that is collateralized on the oil in the ground. But then the bank is sitting on oil exposure that they don't want and can't get rid of (because there is nobody in the futures market to take that risk). Alternatively, XYZ Oil Co can go directly to the bond market, and issue a bond, but the same problem arises. There's a risk being passed around that neither XYZ, the bank, nor the bondholder wants: that of oil price changes. Because nobody wants this risk, everyone demands additional buffer: XYZ wants cheaper financing in case oil prices fall, while the bank/bondholders want extra interest or lower loan-to-value in case oil prices fall. The only person who wants this risk (at a price, of course) is the speculator, and those who want the risk are in a position to provide the best price on it.
The fundamental problem, and why speculators and a futures market are necessary, is that there is a mismatch between buyers and sellers. Producers have long life assets so they would like to have a long dated market where they can reliably hedge their risks and focus on the business of actual oil exploration and extraction. Meanwhile, refiners generally are very seasonal in their activities and need to hedge a certain spread between oil and gasoline. Airlines are very similar to refineries but they're only hedging an input cost. Both refiners and airlines are unwilling to hedge further out in the curve because they're uncertain about what demand will really look like (although there is also some corporate psychology in here...). But either way, you need the middlemen because the two guys at either end just can't come up and agree on a price in an efficient manner. The middlemen serve their function (a function that is in demand), and they're paid for it (at least, on net - many middlemen just blow up).
For the same reason, car dealers exist.
