From sea to shining, sea, U.S. politicians continue to bash traders and blame them for high energy prices. A variety of bills have been introduced that are designed to limit the amount of money that hedge funds can invest in energy, reduce foreign trading and even put an end to energy speculation altogether. Do these politicians have even a basic understanding of how the futures market operates? "No, they're clueless - at least most of them," said former U.S. Commodities Futures Trade Commission chief economist Gerald Gay in a recent Fortune magazine article about oil speculators.
Here's a thought - instead of discouraging speculation, which is a necessary ingredient to provide liquidity in any market, why not instead encourage those speculators to sell and drive prices lower? If you give traders a good enough reason or reasons to sell, they'll do it. Instead of trying to eliminate speculation, why not use it as a weapon to drive prices lower?
Here's what I mean. Remember the movie "Gladiator"? In it, Russell Crowe plays the general Maximus, who gives the order, "At my signal, unleash hell," thus initiating a series of actions that drive the enemy into disarray, retreat, and defeat. Imagine a day in the not too distant future, when the following series of synchronized events are unleashed on unsuspecting commodity traders:
11:00 am: Ben Bernanke and the Federal Open Market Committee shock the markets with a surprise 50-basis point rate hike, sending the U.S. Dollar rocketing higher, and causing oil prices to plunge.
11:01 am: The U.S. Department of Energy announces that it is suspending its policy of adding supply to the Strategic Petroleum Reserve, and will in fact release some of the oil from the SPR into the open market. The drop in the price of oil accelerates as panicked traders begin to cover long positions.
11:02 am: Saudi Arabia announces that it will add 800,000 barrels per day of supply to the market in addition to the 200,000 bpd increase that was announced last week. Sensing a rout, traders sell short energy contracts by the fistful, driving the price of oil to its worst one-day loss in history.
Can you imagine the market reaction that would ensue from this orchestrated series of events? Within three minutes, traders would panic and bail out of their positions, creating an avalanche of selling that would collapse oil prices. While it certainly wouldn't be easy to choreograph these specific events, I'm sure that with a little creativity and a lot of motivation and cooperation, a similar series of surprises can be arranged. If speculators truly are driving energy prices higher – and it's debatable whether they are - then they have the ability to drive them lower as well. Let's give them a reason to do so.
