Ellis Boxer & Blake
Prohibitions On Market Manipulation and False Information in Subtitle B of the Energy Independence and Security Act of 2007
I think it's greta to have Rule 10b-5 essentially extended to the oil traded on the Nymex and ICE exchanges, and this rule should go into effect. I'm not sure, however, that you are going to accomplish what you need to which is to eliminate speculation on these exchanges. As you can see from the attached chart, the increase in crude prices on the Nymex exchange correlates directly with the rapid and dramatic increase in volume on the exchange starting in the summer of 2007. There was no dramatic increase in damand at that time. Rather, investors who never had any expectation of taking any delivery of the product poured millions and millions of dollars into the market because they saw that the credit/housing/financial crises was going to negatively impact the equities markets, which it has. They needed a place to put their money and they put it into oil. Consequently, investors in this market created a phantom demand which dramatically and unnecessarily increased the price. As a result, a relatively small number of investors in this market have further exacerbated economic conditions in the US, have put millions of people out of work, have brought the airline and auto industries to their knees, and have now created inflationary pressures as energy prices work their way into all consumer products which require oil for manufacturing and transportation, which almost all do. The FTC needs to immediately put into effect a rule which limits traders on these exchanges to only those who can and will take delivery of the products traded. There are a couple of ways to accomplish this. One is to dramatically increase the margin requirements to say 50% of the contract. Another way is to have traders submit proof that they, or their clients are prepared to take delivery of the contract. Thus only registered suppliers and registered wholesalers will be trading on the exchange which is likely what was happening in practice before the summer of 2007. These changes need to be put into effect immediately in order for the price of oil to reflect true supply and demand.