The Price of Oil Can be Lowered

According to an article I read, and pundits on TV, ‘Perhaps 60% of today’s oil price is pure speculation’. The fact is, there is speculation as to how much speculation has driven up the price of oil. I think there is near universal agreement that speculation is having at least some effect in driving up the price of oil. Whether it's 60%, 30%, or even 20%, it's significant. Now I'm not an econometricist(?), so I won't throw figures at you. What I will propose is a way to remove speculation from the market, while maintaining a free and fair market.

First I want to state that anyone who understands markets knows that neither the government, trading firms, or speculators can control price in the long term. That being said, exchanges in their regulatory capacity, can do a lot to dampen speculation.

I don't know how many of you remember back in the 1970's when the Hunt brothers cornered the silver market. I'll give a short synopsis as I recall it. As I said, Nelson Bunker Hunt and his brother cornered the silver market, and were squeezing the shorts unmercifully. Unfortunately for the Hunts, the shorts were largely exchange insiders, and they were losing a lot of money. What to do?

When you have the power, you change the rules. Such as a ban on opening long positions and increases in margins. What happens? All of a sudden, the equation changes. If no one can open a long position, there is no one to buy. The price going down combined with increased margins to hold positions means ever increasing liquidations, leading to a downward spiral.

Since most of us, other than the oil companies, can agree the high price of oil is detrimental to our economy, and is against our national interest, there is even more incentive to change the rules here than there was against the Hunts. Perhaps it can be national policy for the CFTC to force/persuade the US and international exchanges that trade oil to increase the margin to 100% or some other high figure.

Let's look at this proposal. With the 1000 barrel light sweet crude contract traded on the NYMEX, the margin is between $7250 and $9788, depending upon whether you are a member or a non-member customer. This means that for under $10,000, anyone can buy 1,000 barrels of crude oil for future delivery. If that margin was moved up to 100%, at todays price of 131 for the July contract , a speculator would have to put up $131,000 to hold that contract. This would dramatically cut down on speculation, and would bring prices down drastically. Limits could also be put on opening long positions. In no time, the speculative portion of oils price would be worked out. This is a crude (no pun intended) proposal, but the "experts" could work out the details. It's pretty simple, so let's get this in motion. Even the fear of something like this happening could begin driving speculators out of the market, and bringing down the price. Meanwhile, I'm glad I filled up my cars yesterday, while gas was still under $4.00 here. Can't say that today.

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