A variety of fuel-using groups, including the American Trucking Associations, are looking to Congress to control “excess speculation” in oil and fuel derivatives markets; high oil prices have caused higher prices in the trucking services industry and rogue traders are an easy target. “Derivative” has become a scary word in economic discourse, but the issue at hand is mostly oil futures, where people lock in a price for future delivery of a product. Agricultural futures date back to the 1800s, where farmers and buyers of farm products would lock in prices for their products; oil and fuel futures are more recent creations, dating back to the 1970s.
Not everyone that is in the futures market is looking to hedge a sale or a purchase; some speculators may step in if they see prices out of whack and wait for the price to recover, when they take an opposite position and pocket the difference in prices. If there are more people that are interested in selling then there are buyers in the futures markets, speculators can step in to buy contracts; conversely, in a market with an excess of buyers, speculators can step in and be on the sell side of the deal. In such situations, speculators provide liquidity to the market, keeping prices from going on too much of a roller-coaster ride.
Thus, over-regulating speculators can be problematic, for if non-hedgers are precluded from the markets, prices would be more volatile. That wouldn’t be good for the financial markets or the freight carriers looking to hedge their price on diesel fuel.
If speculators were betting on prices going down, the ATA wouldn’t be complaining about excess speculation; it’s only excessive if the price is going in the wrong direction. There does seem to be a bit of institutional money with long positions in oil futures betting on high oil prices, but regulators will need to be cautious in not taking liquidity away from the energy futures markets in the name of hunting down over-speculation.
Source: http://www.joc.com/node/416463
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