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Totally agree on getting the speculators out of the oil commodities market. I do want to point out something else, though: do you know that the "fossil fuel" theory of oil is just that -- a theory? I'd always assumed that it was a proven fact but it turns out that it hasn't been proven at all. Yup, it's another "scientific consensus," like global warming. There is another theory that has been around for years: the abiotic oil theory. It states that oil does NOT come from decayed dinosaurs and rain forests, but rather is produced naturally and continuously by the earth very deep within the mantle and gradually seeps up. There is a lot of convincing evidence for this, such as the fact that oil is being discovered at such depths today is supposed to be impossible according to the fossil fuel theory, since the dinos and rain forests didn't sink that deep. The Russians have been operating under the abiotic theory and that is what led them to drill deep. Using the same theory, the Vietnamese have found deep oil in bedrock, which, again, argues totally against the fossil fuel theory. I highly recommend you Google it if you're interested. Anyway, think about it: isn't the fossil fuel theory just tailor made for liberals, with its gloomy predictions of "peak oil," which will necessitate conservation, sacrifice, higher oil prices and a switch to alternative (and cleaner, more earth-friendly) energy sources? What if the abiotic theory is true and we will NEVER run out of oil?

I am also a believer in the abiotic oil theory. It explains why previously dry wells are refilled as if magically. Besides, I don't think the dinosaurs (or their oily remnants) were three to five miles below the current surface of the planet...

I agree on the speculators part, but one of the reasons why there has been so much investment in oil is the whole supply/demand thing. Experts state that the trend will be for the rising gas prices to compel Americans to demand less, thus the market correction - bubble bursting - and a drop back to actual $75 dollar or so worth of barrel.

Now, Im no expert on the subject, and my knowledge of same is layman, but it stands to reason that we have serious problem: We have built no refineries or drilling platforms since the seventies while our population and consequently our demand for oil has increased exponentially while our supply hasnt.

So, yeah, the speculators are whats making prices go up, but their speculations are based on our low productivity and high demand.

I work at a hedge fund, and I have to agree with your analysis. Thank god my hedge fund is not short minded, there will be a huge price correction on oil...We just don't know when.

Speculation in oil has been available to anyone with a few grand and a retail futures account since about 1980, yet crude prices have been rising only for the past few years. The real causes of the current price runup are a weak US dollar and, mainly, high energy demand from China and other growing economies.

Speculators perform a critical economic function by providing liquidity to consumers and hedgers, and by providing price information to everybody. They exploit existing price trends; they do not cause them. Historically, speculators get scapegoated every time there's a big price runup in any commodity. However, restricting speculation has never increased the supply or lowered the price of any good. All such restrictions do is raise everyone's cost of doing business.

as I added on the update. there is adequate supply and given that demand has remained the same in the last 24 months does not justify a doubling of gas prices.

What should the price of gas be?

If the true market value of a barrel were at $ 70 based on true supply and demand and not on futures speculation of $ 137 a barrel, then a price of unleaded gas should be about $ 2.20 per gallon rather than $ 4.10 per gallon.

Why do you think it should be $70/bbl and not $35 or $10 or $200? There is no way to know without a market. And if you don't allow speculators into the market there will be more risk for producers and consumers, because they will have fewer people to trade with. This means wider bid/offer spreads and thus higher costs for everyone. Speculators act as middlemen, effectively competing with each other to narrow price spreads. To do this, they accept risk in exchange for the possibility of gain. Take away their potential profits and they will leave the market.

And anyway speculators don't move prices in any big or sustained way. At best, speculators ride or anticipate price trends; they don't create the trends. You are blaming messengers for the news. Ban speculation and prices will go higher, faster and lower, faster, with more uncertainty (higher costs) for everyone.

there's a big difference when you're buying futures at 5% margin rather than 50%.

This is an inflated market price. Just like the internet stocks were highly inflated. They were not worth their true value which led to a bubble burst.

Electricity for example is sold on the open market, but to actual buyers; power companies. Not hedge funds. Electricity is highly regulated and rightly so (the quid pro quo of having a monopoly).

Our oil companies produce only 10% of the oil used in the US. The unregulated speculation is only causing themselves and the arabs and chavez to get rich at our expense.

In my humble opinion, they are no different than those that do business with Castro. They don't give two hoots about the people who have to fill their tanks and would gladly do business with the devil if it makes them a buck.

Again, your argument does not explain why oil prices waited until recently to go up.

Also, both you and the columns you cite confuse stock margin and futures margin. They are not the same thing. Stock margin is a down payment on a purchase. Futures margin is a performance bond on a contract to buy OR sell. There is no cost incentive to either buy or sell oil futures; and even if the cost to buy were somehow lower relative to the cost to sell, margin costs are a trivial consideration relative to the risk of losing money on a highly leveraged position if you are wrong on price direction. And if the market really is overpriced, why don't speculators short oil futures contracts in expectation of a decline? As you point out, they are only in it for the money, so if the price really is too high they should favor selling.

The Clinton administration was correct to raise or eliminate position limits on oil futures contracts. (They did it in other markets too, IIRC.) The global oil market is enormous, and the previous position limits were too small to accommodate the business needs of large hedgers and traders. Again, if low position limits constrained market manipulation by speculators, why did the price of oil wait several years to rally?

Large, global, highly capitalized markets like the oil market are extremely difficult to manipulate. Even if it were possible for speculators to boost prices artificially, it's inconceivable that prices could be kept artificially high by tens of dollars per bbl over a long period. Nobody has that kind of capital to risk, and anyone who tried would quickly go bankrupt.

Markets rise and fall for all kinds of reasons. The fact that nobody can prove that Variable A or Variable B is the cause of high oil prices does not mean that the market is rigged. It means only that most people don't understand what's going on. Why do you think that you and Kaletsky know better than market participants what the price should be?

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