There is a Senate bill in the works now, called the "Stop Excessive Energy Speculation Act". Part of the act forces the CFTC to "distinguish between 'legitimate' and 'non-legitimate' traders": the legitimate being those trying to manage their risk, and the non-legitimate traders being the speculators.

The futures market was created so producers of commodities (be it oil, corn, wheat etc.) could manage their risk. If a wheat farmer was worried that wheat prices would drop, but feels current prices are acceptable, he can hedge his risk and sell his commodity at current prices. On the flip side, if General Mills was worried grain prices would increase - thereby increasing their cost of doing business - they could hedge their risk and buy the commodity at current prices (with delivery of the commodity set at a future date).

Speculators are the ones who assume the producers risk of price fluctuations, in hopes the commodity will move in the speculator's favor. Without the speculators, there is no one to pass the risk onto, forcing the producer to assume the risk (as we all know, they just pass the added cost onto the customer). As mentioned in a previous blog post, speculation on onions was outlawed. Due to the increase in risk, prices were - and still are - extremely volatile.

Speculators play a very important role in the commodities market: to help keep prices stable, and so the producers of commodities can pass the risk onto them (instead of us). Removing, or even displacing, the oil speculators we will see history repeat itself.

I say "displacing" the speculators because some economists feel that this act will move speculation to oversees exchanges - where regulation isn't as strict, nor overseen by American authorities. I currently have a large chunk of my 401(k) in an international fund. Funds like this will continue in the role of speculation oversees, if Congress forces it to. Speculation will not cease if this myopic act passes.

I understand Congress needs to blame someone. But where is a mirror when you need one?

Congress is still against drilling for oil because they deem it short sighted, and a short term solution. I agree. The fact of the matter is, if gas is at a buck a gallon, an alternative energy solution would fall by the way side. I also agree that we need to find an energy solution that is renewable, and doesn't require us to depend on foreign lands.

However, drilling in Alaska and off of the continental shelf will not give us $1/gallon gas. What it will give us is $90 ~ $100 per barrel oil. This, in my opinion, is a sustainable medium: oil would be expensive enough to make research in alternative fuels profitable, and oil wouldn't so expensive - like now - that citizens can't afford gasoline and heating oil.

Politicians argue that if we drill now, we won't get oil in 10 years. Well, that depends on who you ask. The oil companies themselves claim best case scenario - which would be the easy to reach spots  - oil can be had in 18 ~ 24 months. Worst case scenario - the hard to reach places - upwards of 8 ~ 10 years. The oil companies say we can have American oil flowing and on the market in 18 months.

But politicians also fail to recognize that it will probably take 10 years - or more - for an alternative, sustainable, renewable energy source to come online. Oil at $140+ for a decade will crush our economy. But if we drill now, $100 for oil is painful enough to push for research, but not crushing.

We need speculators - on our exchanges, in our control - to keep prices stable. The onion market has shown us what will happen if we take out the speculators.

We need to drill now to get oil prices in the $90 ~ $100 range. Expensive enough to drive research, cheap enough it doesn't wipe out our economy.

First, some credentials: I am a licensed and registered commodities broker (Series 3 & series 30), and deal with speculative markets on a daily basis at the investment brokerage I work for.

Speculation does affect prices. Speculators create new highs, and new lows. However, speculation by itself is not able to maintain recent highs (lows) without there being a fundamental reason - supply/demand - backing such prices.

While speculation may have caused oil prices to reach its new highs, without a fundamental backing these highs can only be maintained by speculators for hours, a day or two tops. The simple fact that global supply of oil is 85 million barrels/day while demand is 87 million barrels/day is the fundamental fact for oil prices to maintain their highs.

Congress is after the CFTC (Commodities Futures Trade Commission) to do something about these speculators. This has happened in the past, and in the past Congress got its way. Case in point: in 1958 Congress banned futures trading (speculation) on onions - this law still stands today. Onion farmers blamed "moneyed interests" - speculators - for major price movements, and lobbied Congress to ban trading on onions. As a result, onion prices are extremely volatile, swinging up and down 400% over 6 months in 2006.

A 1963 study by a Stanford economist, analyzing prices before and after the ban, showed that the speculators actually helped stabilize onion prices.

Moreover, it is important to note that contracts of buyers expecting the prices to go up must equal the value of contracts for sellers expecting the price to go down. Speculation is a means producers of goods can help protect themselves against future price changes. Speculative investments are not responsible, neither partly nor in whole, for our $4/gallon gas.

The price of oil continues to skyrocket. Prices of food are starting to create problems. It seems our politicians are doing nothing to help us. Let me run a theory past you, a theory as to why I think they appear slothful. Before I do, please allow me to preface this excerpt and say that I do not agree with the positions "I" claim to take below. Below is just an example, and for the sake of argument.

Lets say I'm a politician - Senator, Congressman, whatever - and I have the interests of the American people at heart. As an elected official, I see a couple of problems on our horizon:

Terrorism threatening American lives
Global warming
Our dependence on foreign oil
The outrageous energy prices
And the recently rising food costs
(In this list I won't neglect health care, poverty, education, etc, but will tackle those later)

Let me reitterate: I have the interest of the American public at heart, and I love America. I want to do whatever I can, as an elected politican, to curb the aforementioned threats. One solution that will help out a lot is finding what I like to call the ESB, or the energy silver bullet. We'd kill many birds with this one stone. I'm sure we all agree up to this point.

America has the best rseearchers, scientists and engineers in the world. If anyone is going to find the ESB, it's probably going to be America. But it seems the funding, and the researchers are not going towards finding the ESB. This could be because they are researching other things, like cures for cancer and AIDS (how dare they!), but there are plenty other researchers and funds available, and we need them to be devoted to finding the ESB. I think it is because there is not a high enough profit margin for the research. I understand research is time consuming, and very costly, and for one to embark on such an endeavor would have to require a return worth the initial investment. Thankfully, I as an elected politician, see how I can help make there be profit for research in finding the ESB.

How I can help? I need to help make our current situation as painful as humanly possible. Think about it: how much research for the ESB is going to be done when gasoline is at $1.00/gallon? On the flip side, theres more inclination to further research when gas prices are high and painful.

That is why, I as the elected politian, am against ANWR. That is also why I am against the building of new refineries. I don't want to drill in ANWR, that will lower the cost of oil! Not only does that not get us the ESB, but isn't it our goal to get off of oil?

We can't build new refineries. Hurricane Katrina taught us a lesson about these refineries: if a couple get knocked off line, prices go up because supply is affected. If there were more refineries, supply wouldn't have been affected as much, and prices would have stayed stable. This does not help us find the ESB.

Corn based ethanol is proving to be a joke. It is consuming our corn crops, and is contributing to the increase in food prices. Admitting this, I still favor corn ethanol just for the sole purpose of making food costs more expensive - making it more painful to stay where we presently are, and more lucrative to find the ESB. The best part? People will think I'm in favor of this because I am in bed with environmentalists and special interest groups. This is just a cover for my underlying motive. Corn Ethanol is not the ESB, but it is necessary in helping us find it.

I am against nuclear power. Nuclear power is currently the cheapest, most efficient way to produce electricity - 1/2 the cost of coal. As mentioned earlier, low costs is not what we need right now. Thankfully we have the fear of global warming preventing the construction of new coal plants, our electricity prices will rise as demand continues to increase and the inability to meet this demand is unfulfilled. Maybe once we find the ESB and no longer need to enduce such pain on ourselves will I be in support of new nuclear reactors.

To find the esb, the voice of the people needs to be unified! United we stand, right? We all want to reduce the current pain, but we must find the longterm solution. Standing in our way of finding the longterm solution, the ESB, is the necessary research, funding, scientists, engineers, etc. The American public needs to be in so much pain that we all unify and focus our time and energy to find the ESB. That is why, I, as the elected politician, want to inflict pain onto the american people - to oppose ANWR, nuclear, LNG, and am in favor of corn ethanol and tax increases. Becaues I believe that only through this self inflicted pain will we be able to focus our energy to find the ESB.

Finding the ESB will kill many birds with one stone: we cut emmissions to down, hopefully to zero; we become independent from our enemies; and because America found the ESB, America will continue to be a dominating factor in the world.

I'm sorry to inflict such pain on you, but please understand, this is for your own good.

Think real quick of an Asian city. If you've been to one or seen many pictures, an image of tall buildings, crowded streets and a million scooters may come to mind. A year or so before my assignment in Beijing, I bought a little scooter. 100 miles to the gallon, baby! Although, I really didn't care about fuel economy... I'll be honest, I was mostly concerned about the sex appeal.

Whoops.. back on topic. You'll be scant to find a scooter in Beijing. Its very.. un-Asian, almost.

I've spent a great deal of time in the scooter-intense cities, where there are innumerable amounts of scooters. I've seen a family of 5 riding 1 scooter. Suddenly America's onerous laws seem appealing.

But I was told Beijing outlawed them. I still see the occasional scooter or motorbike, but back home I saw more scooters on the road.

When I first heard this, I was a bit annoyed, because most scooter riding citizens probably can't afford a car, and outlawing scooters forced them  to either ride a bicycle to work, or rely on public transport. I try my best to avoid public transport because every bus that passes looks like a can of sardines. Subways are packed so tight during the morning rush hour, you can sometimes lift your feet off the ground.

I'm not joking.

I was talking about this with a fellow expat friend of mine, and other than the expected argument that scooters are dangerous and too many people are getting hurt, he made an astute observation: innumerable scooters equals Asia equals third world country. Think about it, can you imagine a huge Asian city without the scooters?

I wonder if this was a motive for Beijing lawmakers. If so, I must give them kudos.

I was registering at my local police station the other day, as is required for all foreigners living in China. Since there are a lot of expats living in Beijing, the process is rather painless. All it takes is a quick visit to the police station, stand in line for 30 minutes, hand them my passport and a slip from my apartment complex verifying my address, and 2 minutes later I'm done.

While waiting, on the wall was a list of rules for registration, and penalties for failing to comply. I had to laugh at the last sentence: "Your legal rights and interests will be protected by the police."

Americans are usually a very responsible people. Parents take responsibility for raising their own children. People take responsibility for their neighbors who are in need of help. The average citizen takes responsibility for their own actions; their interests are protected by themselves.

Well, some of us, anyways. It seems the lack of personal responsibility is growing, and more and more people are relying on the government. I read a recent statistic that showed the 10 poorest cities in the US, and only 2 of the cities had ever elected a Republican mayor since the mid 70's - and collectively consisted of 3 terms. Even though citizens of these cities are in a perpetual state of poverty, it seems they take no responsibility for their actions. Rather, they continue to rely on the great hand of the government to provide for them, and will continue to vote for mayors who will continue to supply the welfare checks.

Now about that quote I mentioned earlier... I honestly forget if I was in Detroit or a communist country...

Even though I'm on the other side of the planet, I can't go anywhere online without reading about the insane prices of Sweet Light Crude oil. China combats this with their own oil imports, "Sweet & Sour Crude". Only available through takeaway, though