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As Memorial Day approaches, many Americans are excited to kick off the summer driving season and take in new sights and experiences with their loved ones. Unfortunately, an unwelcome passenger on that trip could be needlessly high gas prices picking the pockets of American consumers. While there are several factors that contribute to the rise in gas prices, oil companies profiteering and commodity speculators appear to be significant contributing factors and regulators and policymakers need to act to ensure that the public interest is protected.

Prices for commodities like gas and oil are supposed to reflect their fundamental value based on supply and demand.  Those prices should be based on the purchases and sales by actual commodity producers and purchasers like oil companies on the one hand and gas station owners on the other (resulting in what is called “price discovery”). However, there usually are not enough of those physical producers and purchasers (sometimes called “end users”) at all times to always satisfy the supply or demand.  That is why financial speculators are allowed a very limited role in the commodity markets: to fill the gaps when physical producers and purchasers are not readily available to buy or sell.

Thus, speculation is a legitimate and necessary part of the commodities markets because it can provide liquidity and help to facilitate price discovery.  But permissible speculation must be limited, or it will overtake and undermine these markets, defeating the very purpose of the markets.  That is why excessive speculation is explicitly prohibited by law.  Excessive speculation in commodity markets occurs when speculators disproportionately influence the prices of commodities beyond their fundamental value.  That can occur due to high volumes of trades and large positions involving traders or investors engaging in speculative betting, such as buying and selling oil futures contracts, with the primary goal of profiting from short-term price movements rather than actual consumption or production of the underlying commodity.

Excessive speculation in the oil and gas commodity markets hurt Main Street families who rely on these essential resources.  That’s because speculative betting often contributes to price volatility and has a strong impact on prices which drives up the price of oil and, subsequently, the price of gas. Price volatility in the oil and gas markets makes it hard for families to plan and manage their expenses. Unpredictable fuel prices directly impact the affordability of driving to work, driving kids to after-school activities, and driving to vacation destinations.  This volatility disrupts budgeting and makes it challenging for families to allocate their resources effectively.

Higher oil and gas prices also have wider economic implications. Businesses, especially those heavily reliant on transportation or energy-intensive operations, face increased costs. To compensate for these expenses, businesses often pass them on to consumers through higher prices for goods and services. This economic chain reaction further strains the financial budgets of American families, making it even more challenging for them to meet their basic needs and maintain a reasonable standard of living.

Fortunately, Congress mandated the Commodity Futures Trading Commission (“CFTC” or “Commission”) to establish and enforce regulations to define and restrict the volume of trading and positions held by speculators.^[1] These measures are designed to reduce, eliminate, or prevent undue burdens within the market.^[2] The Commission was also mandated to reduce, eliminate, or prevent excessive speculation in the commodities markets.^[3]

Limiting the trading positions of speculators (called “position limits”) can serve as a vital tool for the CFTC in its efforts to address price volatility and uphold the functionality of energy derivatives markets for the benefit of commercial producers and consumers. The aim is to ensure that embarking on a drive to the beach doesn’t become an excessively costly endeavor for families. However, the CFTC’s most recent rulemaking on position limits falls short of achieving the necessary equilibrium between the interests of producers and consumers, who are the primary focus of derivatives markets, and the role of speculators, high rollers that should remain confined within defined boundaries.^[4]

[1]                7 U.S.C. § 6a(a)(1).

[2]                7 U.S.C. § 6a(a)(1).

[3]                Id.

[4]                See generally Better Markets, Comment Letter: Position Limits for Derivatives (RIN 3038AD99) (May 15, 2020),(https://bettermarkets.org/newsroom/cftc-s-long-overdue-position-limits-rule-will-not-stop-excessive-speculation-will-raise/)