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.