Oil Futures

There is quite a bit of sentiment to regulate the oil futures markets.

Basically oil futures trade in 1,000 barrel lots as I understand it. You can buy for future delivery or you can sell. At say $130 per barrel a minimum contract would be $130,000 but you buy or sell it on margin. The margin is usually between 5% and 7% so for less than $10,000 you can be trading in oil.

If you think the future price of oil is going up then you buy a contract which you can sell before the time of delivery and thereby your profit is the difference. So you buy a contract for August oil at $130 as an example. The "spot" price or the price someone actually will pay in August ends up being $135 and you sell your contract at that price thereby making $5 per barrel or $5,000. But you only invested $10,000 because of the margin so you made 50% on your investment. Pretty good.

It can be done the other way, too. You really aren't trading oil but contracts or paper.

So the current popular idea is that this speculation is causing the price of oil to climb more than it reasonably should.

That may be true. But it may not be true either.

There are several valid reasons for commodities futures trading. But generally such markets benefit both producers and consumers by spreading risk, helping to stabilize prices, and making demand less turbulent.

But there are famous examples of markets being manipulated and causing terrible consequences for all sorts of people.

The idea is to increase the margin requirement from the current low rate to a higher rate. One such rate that has been discussed is 50% which would mean it would take 7 to 10 times the amount of money to buy a contract. That would undoubtedly reduce the number of traders.

It is nearly impossible to predict what will happen though.

I worry about unintended consequences.