Article from Yahoo: Why There Should Be More Oil Speculation, Not Less

By Daniel at 10 July, 2009, 10:04 pm

“Oil trading causes prices to spike. What seems to be good for your personal portfolio is not good for US and therefore, ultimately is not good for you either. Forget dependence on mid-east oil and focus on US reserves already leased. Thousands of acres of undeveloped oil-leases waiting for production here in US. Then, start thinking GREEN.”

–Lin

We need more — not fewer — oil traders. After a roller-coaster ride that has sent oil prices from a record high of $147 per bbl. last July to below $35 in December and back to around $60, there has been a clamor to clamp down on speculators — those investors who trade oil but don’t ultimately supply it or use it (the way airlines do, for instance). The economic disruption caused by oil’s volatility has been so vexing that the Obama Administration believes it can stabilize prices by regulating speculators out of the market. It can’t.

So much money has piled into oil that there’s a belief that there are too many people involved in the futures market. In fact, the opposite is true. The participants are so few that a couple of major players can, if they choose, garner absolute control, cornering the market and creating a price bubble for their own benefit. (Read “Oil Shocks: Biden, Iran and Fears of Another Price Jump.”)

Currently, with virtually no regulation, the oil-futures market — given that it drives the price of oil worldwide — is very small. Dangerously small. To limit trading would make it smaller still. If the government decides to curb trading in the oil-futures market, it would limit trading by purely financial speculators. Instead, the government should focus on trade activity by oil companies, oil suppliers and oil hedgers like airlines. Yes, you read correctly: oil traders with physical ties to crude represent the greatest threat for another price hike.

The oil-futures market is tiny compared with the physical oil market: less than 3% of the world’s oil consumption over the next year is accounted for in the open interest — the contracts currently being traded — at the New York Mercantile Exchange (NYMEX). To put it in perspective, Saudi Arabia alone produces four times that much oil. Consider the leverage that the futures market allows — you can trade more than 10 times your money in oil — and suddenly every dollar you put into the futures market controls well over $300 worth of oil. We can put a price tag on the whole market: for a mere $4 billion, you can easily control the fate of the entire multitrillion-dollar industry. Goldman Sachs pays out more than that in annual bonuses. (Read “The Reasons Behind Big Oil Declining Iraq’s Riches.”)

http://www.time.com/time/business/article/0%2C8599%2C1909756%2C00.html