Limits on Oil Trading Won’t Change the Price

Posted by Jeff Carter
on May 17th, 2012

Legislators have ramped up efforts to curb oil trading. They think that somehow, if no one is able to trade, the price will go down. Unfortunately, many at the CFTC agree with them. It’s like the see no evil, hear no evil, say no evil monkeys.

Here is what they said according to today’s Wall Street Journal.

“We are deeply concerned that the ongoing work to develop regulations implementing the Dodd-Frank derivatives provisions leaves our energy and oil markets operating without sufficient protections against excessive speculation or its effects,” Sens. Dianne Feinstein (D., Calif.), Olympia Snow (R., Maine), Carl Levin (D., Mich.), Tom Harkin (D., Iowa), and Maria Cantwell (D., Wash.) wrote in a letter dated May 15.

Harkin would also like to put a transaction tax on trading.

Curbing speculation in any commodity won’t work. It will simply force risk transfer and price discovery into less transparent marketplaces. Forcing markets underground into the dark ages will open up opportunities for profiteers to exploit structural information holes between dark markets. Dodd-Frank doesn’t do anything for transparency despite the protestations of its advocates. The only thing Dodd-Frank does is make it easier for the government to demand lots of paperwork from traders the government decides to go after.

What we should be doing is encouraging more information flow. The way to do that is transparent markets. How do we get more transparent markets? By getting more people to trade in them, and that includes speculators. Lots of them. The more, the merrier.

What legislators should be doing is figuring out ways to correct regulation so the private market place can increase the supply of energy. More supply of energy will decrease the price. Hint, it’s not through spending money on solar, wind and algae. It’s through nuclear, natural gas, coal and more crude oil.

UPDATE

Had another thought. One of the reasons that the JP Morgan ($JPM) whale was able to assimilate such a large position was the CDS market he traded in. It is not a transparent market with a lot of players. It’s a dark market with relatively few players. Even though the dollar size of trades is huge, don’t let notional value skew your thinking. The CDS market is one of the more clubby in town. A more open and transparent market would have sniffed it out faster.

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