Why Speculators Are Good for the Oil Market

The speculators pick up the risk of adverse price movement in exchange for the opportunity to make a profit. Take them away, and you harm the "natural" users of the futures exchange, the producers and consumers of the materials.

The question remains, of course, whether people who shouldn't be exposed to so much risk are participating in the markets, and could be harmed. But that's a separate (albeit related) issue.

Limits on speculation "could create an environment that causes a liquidity crunch, could distort prices and could drive liquidity into unregulated markets," adds CPM's Christian.

Like the debt-market liquidity crunch, which meant borrowers couldn't find willing lenders, this could mean hedgers won't find willing counterparties at a reasonable price.

That, then, undermines the other important role of futures exchanges: price discovery.

Mostly, Christian is skeptical about government's ability to stamp out speculation. He says the most likely outcome of position limits would be for risk-takers to find unregulated markets either in the U.S. or overseas.

With the current situation, there are certain limits on speculation and trading occurs in the most transparent parts of the market -- the ones regulated by the CFTC.

So, the people looking to restrict speculators want to assume speculators are guilty until proven innocent, restrict the ability of companies to conduct their business and limit the ability of citizens to try to make money in the markets.

I may be British, but that seems pretty un-American to me.

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