It’s a hard problem to fix, for two reasons.

First, as long as they’re only a modest fraction of the market, speculators are a stabilizing force–they’re ready to buy when all the farmers are selling, willing to sell when all the food companies are buying. Squelch the speculators too hard and you’re right back to seeing big seasonal changes in market prices (grain prices down when he crop comes in, oil prices up when refiners build stocks in advance of summer driving).

Second, as a practical matter, it’s hard to tell a speculative trade from a non-speculative one. If an airline buys contracts for a year’s worth of jet fuel, you could suppose it was non-speculative–but what if they buy contracts for 10-year’s worth? What if they buy contracts for 2 year’s worth while simultaneously selling contracts for 1 year’s worth? If a health-food company that can’t find a contract on quinoa uses a contract on wheat as a proxy–is that speculative?

Producers can be expected to sell when they have product and consumers can be expected to buy what they need. Speculators, as a pool of capital willing to buy when the price is low and sell when the price is high, can be a stabilizing force. Of course, many speculators are idiots and just make bubbles and crashes worse. It doesn’t mean that we wouldn’t suffer just as much if speculators were banned–we’d just suffer differently.
.-= Philip Brewer´s last blog ..Book review: Life Inc. =-.

Wouldn’t it be funny if they all had to take delivery of product while running up the prices? I think it would be hilarious to see a huge oil silo next to the NYSE on Wall Street. Then I’d come on by and stick my straw it!
.-= Dave C.´s last blog ..Don’t Assume Somebody Is Monitoring Your Retirement Or Investment Accounts =-.

I’m not a big fan of Government regulations, because they usually do more harm than good for consumers.

But, it’s fairly obvious the energy markets are being manipulated and have been for decades. Being from California, I was a victim of the Rolling Blackouts (aka Rolling Blackmail), where energy companies used “swaps” and “scheduled outages” to create fake electricity shortages. They extorted billions of dollars from consumers and paid a couple million in fines, when they got caught.

In my opinion, the futures markets for energy seems to exist for the sole purpose of enriching speculators and energy produces at the expense of consumers. The argument that it’s necessary to stabilize energy prices is ridiculous. Just look at how the gas prices are sucessfully raised prior to any driving holiday. Anyone who thinks this is a free-market reaction is naive.

I think there should be some reasonable controls on speculators, who have no practical need for the energy commodity. Hedge funds shouldn’t be allowed to bid up oil prices at the expense of commuters. And, oil producers shouldn’t be allowed to create dubious shortages with refinery shut-downs.
.-= Bret´s last blog ..My Problem with Being Frugal =-.