WASHINGTON - Responding to high gas prices, Rep. Tom Petri today introduced a "Sense of the House" resolution calling for a U.S.-led, international effort to lessen the impact of price speculation in the oil markets.
"Many have pointed to the growing involvement of hedge funds and other financial investors as contributing significantly to the ongoing rush toward higher oil and gasoline prices," Petri said. "This is a global problem, and U.S. laws won't be enough. We need the U.S. government to pursue a coordinated regulatory approach among all oil-consuming and oil-trading nations to establish policies which limit inefficient speculative trading and allow oil futures markets to serve their proper function of finding a balance between supply and demand. That's what my proposal is designed to encourage," Petri said.
Petri's resolution is focused on the role that margin payments could play in discouraging speculative trading worldwide. Speculators purchase commodities futures contracts by making a margin payment -- like a down payment -- and promising to make a specific balance payment on a specific future date. The speculator guesses that when the contract comes due, the market value of the commodities will have risen higher than the contract price. Often, such speculators sell the contract before it comes due, never taking actual possession of the physical product.
Petri contends that requiring investors to put more money up front through margin payments would slow speculative frenzy.
Futures trading allows buyers and sellers to lock in future prices, but when markets get overheated, speculators start betting that other speculators will bid future prices up, even when the underlying market conditions of supply and demand do not justify the higher prices.
"Irrational exuberance played a big role in the housing bubble," Petri said. "Prices were rising, and speculators jumped in and bid against each other for real estate they hoped to 'flip,' to re-sell quickly for a profit. But prices got so absurd that people stopped buying, and investors ended up with mortgages on a lot of property they couldn't sell because it wasn't actually worth what they paid for it."
Petri said that increasing margin requirements will "remove the punch bowl" and require investors to pay more attention to supply and demand rather than the bets other investors are making in futures markets. "To the extent that current high oil prices are caused by speculation, we could pop the bubble and cause prices to drop quickly."
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