Calls for members of Congress to limit oil speculation may cause the bubble to burst in oil markets. The reason is that it could shut out buyers of oil commodities that do not actually intend to receive delivery of oil. If Congress passes such a limit, it could cause price drops of $1 or more per gallon of gasoline.
With gasoline prices reaching over $4 per gallon, there has been much pressure on oil producers to increase production. However, the main oil producing countries have stated that they believe that oil prices are being driven up by speculation, not by demand pressures.
There is additional evidence that substantial speculation is artificially driving up prices of oil futures. Members of Congress are under much pressure to limit any speculation that is unfairly driving up the cost of gasoline for consumers and businesses alike.
The main similarity between the oil price bubble and the housing market bubble is that the primary source of overspeculation is from those who are not primary users of the product. Housing speculators bought properties that they did not intend to occupy as a primary residence. Instead, they wanted to hold the properties and sell them several months later at a higher price.
The same situation has cause dramatic price increases that are responsible for higher gasoline and food prices that are passed on to consumers. Many buyers of oil futures are simply gambling that the prices will continue to increase, paying them enormous profits in a relatively short period of time. They are investors, not actual buyers or users of crude oil or refined oil products.
If such “outside” speculators are blocked from US oil futures markets, this could cause a substantial drop in demand for such futures. The end result would be price drops that would eventually be passed on to consumers through lower prices on everything that relies heavily on the price of oil.
Such an act could reduce inflationary pressures and help to reduce the impact of the current recession. Lower gasoline prices will enable Americans to spend money in other areas as well as to better afford their current obligations.
Long Term Implications
Congressional limitations on oil speculation can only reduce overspeculation in U.S. exchanges. Such limitations will force speculators to utilize overseas markets that are not subject to federal regulations. This could further reduce federal oversight on such speculation that could ultimately drive up world oil prices once again.
The exception will be if similar measures are passed in other nations that maintain major exchanges. That would ultimately reduce such speculation worldwide.
At any rate, far too many speculators have profitted from artificial price increases due to their overspeculation on oil futures. Congressional action will prompt price drops. However, it is also possible that the bubble will burst on its own as consumers continue to cut back and demand drops.
Tags: oil price speculation