Dear John: You recently wrote an excellent article about commodity speculation, a subject I know a lot about.
Speculators’ function in a commodity market is to provide liquidity, and to profit from that activity. Normally, they’re a welcome addition to a newer, less mature futures market.
Often, their trading account has such low margin requirements that they can accumulate large positions and drive a market disproportionately to their advantage, without having the actual means to buy or sell outright a futures contract.
However, oil is traded internationally and liquidity in it requires nowhere near the speculative activity it sees daily, to provide liquidity.
Why is this allowed? Is it the speculators’ lobbying efforts? Tax revenues produced to the government? Would margin increases destroy the market?
I once worked in the futures pits. The leverage is incredible.
At some point the question has to be asked: To what extent does a low margin requirement effectively guarantee “bubbles” and needless speculative price increases that often harm the average consumer? Pete
Dear Pete: If you’ve been reading my column, you know that for years I’ve been saying that commodity speculation needs to be tamed. It’s great that some people make a living by speculating. And it’s good that these trades keep the market lubricated.
But somewhere along the line the best interests of our country and its people need to be addressed.
The US economy has seen pathetic growth over the past four years. Yet oil and gasoline prices have been rising thanks to speculators, which — as I’ve mentioned before — include not only Wall Street’s fast-money crowd but also retirement funds, college endowments and insurance companies looking for higher yields.
These higher prices have hurt the economy. The weaker economy makes it harder for investors to earn a living, which drives them to speculate more, which hurts the economy, which . . .
You get the idea. This is a vicious circle.
Yes, margin requirements could be increased. Or speculators could be required to take possession of their purchases, rather than just buy and sell commodities on paper.
Make them put a few hundred barrels of oil in their backyard, and you’ll see how quickly they move onto some other way of earning a living.
Thanks for writing. Maybe someone in Washington will do something before it’s too late.
Dear John: Do local, state and federal governments benefit from higher oil prices? Are taxes on gasoline fixed, or a percentage of the sale? And if they are fixed at a certain number, are they adjusted over time based on higher gasoline-use levels? J.B.
Dear J.B. States charge a fixed tax on each gallon of gasoline, as does the federal government.
Right now the Federal tax on gas is 18.4 cents a gallon. State and local taxes add an average of another 31 cents to the price of gasoline.
New York state adds a tax of nearly 70 cents a gallon; New Jersey’s tax is half that. If you ever wondered why gasoline prices are cheaper on the Jersey side of the tunnels, that’s the answer.
So states and the federal government actually get hurt when gasoline usage is lower, like these days.
Send your questions to Dear John, The NY Post, 1211 Ave. of the Americas, NY, NY 10036, or john.crudele@nypost.com.