Oil Prices

My favorite magazine (The Economist) has another article absolving speculators for the rise in oil prices. Full disclosure: my company is a market maker on the NYMEX for oil contracts. Politicians attempting to correlate the rise in trading volume (Hedge Funds, pensions, etc now trade oil futures contracts) to a rise in the price are making a huge mistake:

The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing steadily over the past year, yet its price has fallen by half. By the same token, the prices of several commodities that are not traded on any exchanges, such as iron ore and rice, have been rising almost as fast as that of oil.

The way Oil Futures contracts work is that the CFTC forces those not equipped to take physical delivery of the contract (and I believe the NYMEX Crude contracts are for sizeable amount of oil) to close out several days before the actual contract expires. Thus, speculators only bet on where the price will be - they CANNOT actually affect supply by "hoarding oil".

Any change (taxing speculators, excluding those not capable of taking physical delivery, and the other hairbrained ideas floating through Congress) to the futures market would be a bad idea.

At least higher oil prices make "greener" forms of energy more commercially competitive. I would favor changes to the tax code which subsidize the oil industry as a way to further level the playing field for solar/wind/tidal/geothermal/nuclear power. An end to sugar tariffs from Brazil would be another start, as ethanol produced from sugar is more cost-efficient that from corn.