Wednesday, June 11, 2008

US energy markets watchdog agrees that speculation is contributing to the record oil price

I am interested to see that the US energy markets watchdog seems to agree with my analysis that speculators are contributing to the record oil price, and wants to introduce limits on traders' positions

Whether they will come up with sensible regulation is a different matter.

In my view, limits on the activity itself is the wrong way to go about what is needed. Activity should be unlimited but subject to certain norms that help the market.

Here are sensible ways to regulate.

Traders should be free to trade, provided they hold all their positions for a certain length of time - the length of time being different for different activities depending on the structure of the industry involved. Trading in the shares of financial services companies could be say half an hour after purchase because financial services companies are involved in a very wide range of activities and so their fortunes might go up and down in that sort of time-frame, but trading in the shares of industries with a rather different structure (aerospace, for instance) should be held for at least one month. The case of energy companies is similar - if one ignores natural disasters and terrorist possibilites, the supply side takes up to 10 years to influence, while on the demand side the long-term trend is predictable with temporary changes probably depending most on weather fluctuations. Much more precise study will be needed regarded the natural life of each industry so that regulation is appropriate. This is therefore the more long-winded if more precise alternative. The easier but more blanket alternative is the next one.

Traders should be free to trade, provided they hold a certain percentage of each of their purchases (say 50%) long term - by which I mean three years.

No doubt other such mechanisms can be debated so that the most appropriate way of dampening speculation can be found which simultaneously avoids cramping liquidity in global markets.

BTW, the framework for any such regulation needs to be global in geography and comprehensive in terms of the industries involved, otherwise liquidity flows to the regulated industry will be negatively impacted, thereby providing distortedly large liquidity flows to all industries which remain unregulated. Sphere: Related Content

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