WILL OBAMA’S PLAN DO ANYTHING?
All of this brings us back to Obama and the plan he announced yesterday. Essentially, the president would increase penalties for “market manipulation,” give more resources to the CFTC to police the markets, and allow the agency to raise margin requirements, which are the amount of cash investors have to deposit for each trade.
The market manipulation bit is window dressing. Although individual traders have indeed managed to accumulate massive oil future positions, few people seriously believe that illegal manipulation is shaping the market today. The extra money for the CFTC isn’t a game-changer, either.
Increasing margins, however, could have some impact. By forcing investors to lock more money in each trade, it limits their potential returns. That would make oil less attractive, and perhaps cool down the market. Currently, margin requirements are set by the exchanges where oil is traded, not by the government.
So if you believe investors really are overheating the oil market, Obama offered up a reasonable, though not particularly dramatic, remedy yesterday. But ultimately, the price of oil is rising mostly because of two factors: supply and demand. Neither Obama nor anybody else has the power to change either in a hurry.