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Regulation of Non-Commercial Commodity Futures Trading

It was interesting to read about the regulation of “non-commercial commodity futures” in a recent NY Times article. As it discusses oil investment limitations being considered by regulators, the article describes the difference between commercial and non-commercial traders as follows:

“[S]peculative” traders were primarily those that the agency defines as “non-commercial,” which are essentially financial investors who are not users or producers of the commodities and are primarily interested in betting on the direction of prices. “Commercial users,” by contrast, include farmers, airlines and oil companies that want to hedge against the risk of rapid price changes.

According to the article, non-commercial investments in commodity futures such as wheat and corn are already regulated by the Commodity Futures Trading Commission. The CFTC, however, has long left the regulation of energy commodities to the New York Merchantile Exchange. In other words, the exchanges have not been required to “set or enforce position limits aimed at preventing ‘excessive speculation’” on energy commodity prices.

The recently-Obama-appointed GFTC chairman, Gary Gensler, plans to give the difference between the industries a “thoughtful review,” no doubt in an attempt to prevent a repeat of the oil-price rollercoaster ride we’ve experienced in the past year or so.


My question is: Is this a good idea? Should the energy industry be proteceted similarly to the aggriculture industry by not allowing non-commercial investors to trade in futures?

On one hand, it makes sense. The futures markets were originally created to protect farmers from price fluctuations between the time crops were planted and harvests brought in. In the oil industry, there are sometimes years between the Final Investment Decision of a large project and “first oil”—and project profitabilty may not come until years after that. If non-commercial investors are keeping the “futures system” from providing the protection it was intended to provide, then don’t let them play, by golly.

On the other hand, though, there must be some reason the NYME decided to treat the energy industry differently… Right?

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I’m sick and tired of reading articles day-by-day about the price of oil.

Things I’ve seen and read:
It goes up 2-5% on “SPECULATION that the economy is getting better”, “consumer confidence is going up”, “energy demand is going up”, etc. Then a report comes out and it’s reports what is really happening and the oil only drops in price 1%.

“National supplies dropped 1.7% from the month before” and the price goes up. There’s full tankers sitting out in the ocean waiting to be unloaded but because demand is down, who knows when they’ll be needed.

Jobless claims go up from the month before and the price jumps.

The US dollar is weak so the price goes up. What about 8-10 months ago when the election was. I was paying $1.60/gal and I’d say the dollar is a little stronger now than 6-8 months ago. Can you say, let’s try and get McCain in office. This kinda goes with the people which say, “A year ago, you were paying over $4 a gallon.” Well guess what, 8-10 months ago, I was paying $1.60 a gallon so take that excuse and shovel it.

And don’t feel bad about the oil companies either. Exxon posted 2009 1st quarter profits of $4.55 BILLION followed by Shell with $3.49 BILLION. These are PROFITS, not REVENUE. Seems like they’re still doing pretty well in these tough times..

The idea of limiting the participation of speculative investment is presumably based on some model of how such speculation is harmful.

From the article, it looks like they’re suggesting that the instability of global financial markets had a disproportionately large effect on oil prices because speculators used the oil market to try to make up for losses elsewhere. I’m not sure that’s particularly convincing. I’d have to see the proposed causal chain laid out in more detail to really believe it.

On the other hand, though, there must be some reason the NYME decided to treat the energy industry differently… Right?

Presumably. But it needn’t have been a very good one. Regulation vs de-regulation has long been a significant difference between the two political parties, so such a question would be highly politicized.

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