Energy Speculation

Debate has surfaced regarding whether or not the government should impose regulations on energy futures trading.  The CFTC recently reversed course saying that oil price volatility was due to excessive speculation.  The current administration is making a push to limit speculation in the energy markets saying it is a matter of national security.  On the other hand, this commentary speaks in defense of letting the “speculators” continue with their jobs of providing liquidity to the market.  Normally, when you impose restrictions on free markets, there are secondary consequences and costs which are not initially taken into account by the people proposing the regulation.  These costs, in many situations, overwhelm the expected benefits of said regulation.  In the end, speculators place bets based on, not the current underlying fundamentals, but expected future fundamental shifts.  Today, government officials and regulators examining this issue are improperly drawing a link between simultaneously occurring fundamentals and “speculative” trades; in other words, they are ignoring the fact that speculators base their decisions/trades on assumptions regarding the future state of the market.  If the speculators’ views (of underlying fundamentals) do not come to fruition, the market will adjust and they will pay.  We saw this occur with the recent collapse of the oil market ($145 to $33 over a couple months).

-Billy Ray

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