Controlling Speculators -- A Guarantee of Higher Prices

here is my reply today to someone calling for Congress to control commodity traders:

I guarantee that this will cause HIGHER fuel prices, NOT lower them! There are several reasons:

1) CFTC study last fall, following the commodity boom last year, found that speculators were NOT the cause of higher prices.
2) The study found that speculators were EVENLY split between long and short positions.
3) The study found that NON-exchange-traded commodities rose HIGHER and FASTER in price than exchange-traded ones! Speculators tend to STABILIZE prices, not drive them. Speculators are the first ones to see an overbought market and short that market. They FOLLOW trends; they don't create trends!
4) Speculative trades represented a smaller percentage of trades in 2008, during the commodity boom, than they did in 2006 when there was no commodity boom. Presence of speculators tends to DAMPEN and reduce price swings, NOT exacerbate them!
5) Speculative trades in any given commodity represented only 15-18% of the total. Since they were evenly split between longs and shorts, speculative longs were only about 8-9% of the total in any given commodity. There is no way a small minority of the trades could have controlled or driven the market.
6) There are other liquid futures exchanges around the world, including Shanghai, Dubai, Europe, Singapore, etc. If investor funds are unwelcome in the United States, these funds will go overseas to other futures markets. The capital flight will crush the Dollar, and this will lead commodity prices HIGHER! Lower Dollar = Higher commodity prices!
7) Smaller, less liquid markets. Remember when the Hunt Bros. cornered the world silver markets? The small silver market was easily manipulated, until prices rose so high that even housewives were selling their silver in pawn shops. The market grew until the Hunt Bros. could no longer manipulate the market and prices collapsed. A blue whale can throw its weight around MORE in a small pond than in the Pacific Ocean. Less liquidity and smaller markets EMPOWER large market participants, and make it EASIER for them to manipulate prices. The larger the pool of liquidity, the LESS any one player -- including speculators -- can influence prices. The worst thing we can do is shrink the size of the market. This would give Goldman Sachs MORE market influence, not less.
8) The oil and other commodities will flow to those places that are willing to pay market prices for them -- like China.They are signing long-term contracts for every barrel of oil they can find. If we try to manipulate prices here by controlling the market, that oil will go ELSEWHERE. Do you want to wait 5 hours in line to fill your gas tank -- and pay $7-$8 per gallon for the privilege? Just try to control prices by shutting speculative traders out of the market, and you'll have that privilege.
9) Speculators play a critical role in the futures markets -- one that the liberal news media ignores. They provide liquidity and constant price discovery to the market. Absence of these two -- LIQUIDITY and PRICE DISCOVERY -- were what caused the mortgage crisis because those derivatives couldn't be bought, sold, or priced. So now we want to impose those same conditions on the commodity markets? That would be a disaster!
10) The futures markets were developed to bring MORE money and speculative funds into the markets because until they existed, prices for all commodities were erratic with huge swings and price fluctuations. In the fall, farmers could only get pennies for their crops, but during the winter, grain prices were so high no one could afford to buy them. The futures markets brought speculators in and thereby reduced the peaks and valleys, making prices more stable throughout the year. Hence, the use of "contracts". This brings MORE price stability, not less.

Congress and overspending affect commodity prices more than speculators. They aren't the only factor, of course, but if you look at charts for the price of crude oil this year, it is an almost perfect inverse correlation with the Dollar. If you want to see cheaper oil, then lobby Congress for a stronger Dollar, not hobble the futures markets!