Position limits on oil trading: why not?

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Kevin Drum wonders why I'm opposed to a bill that does "sensible" things like regulating position limits.  The historical purpose of position limits is, as noted in his comments, to prevent attempts to corner the market in a commodity, as happened with silver in the 1970s, and all sorts of things prior to them--the corner attempt used to be a common tactic in the stock market before the Depression-era reforms.

I think this is probably wise, though it should be noted that most corner attempts end with the speculator losing his shirt, so you're mostly preventing venal idiots from handing a lot of money to other people.  But that's not what the current rules are trying to do.  They are aimed at hedge funds betting on the future price of oil. 

Those bets provide the market with valuable information:  a lot of people think that the price of oil is going to go up.  The effect of that information is to raise the future price, which makes current consumers unhappy.  But in fact, if the speculators are right, they're doing us a service by giving us a basically gradual price rise that helps us conserve.  If they are on the money, and Congress chases them out of the market, we'll suffer more later, wishing all the while that we hadn't used the stuff so profligately.  If they're wrong, later we'll have cheap gas and more fuel efficient cars, hardly a tragedy.

There's another reason it's stupid:  oil is a globally traded commodity.  Congress can chase hedging activity out of the US, but it cannot actually wring any speculative premia out of the market, because the speculation will simply move offshore.  Congress can control pretty effectively things that are made and used in the US, but oil follows the law of one price pretty astoundingly closely.  All it can really do is chase away hedge fund and exchange jobs--one reason that London and other exchanges have been picking up financial business from us.  In some cases, I think the rules make it well worth chasing that business away--our accounting standards are unusually rigorous, and a damn good thing.  But this bill certainly doesn't bring anything to the table that makes it worth its costs.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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