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Risks of ”Curbing Speculation”

Sigma Investment Counselors

April 17, 2012

President Obama announced today that his administration is interested in “curbing speculation” in the oil markets.  Is this a laudable goal?  We have to remember how speculation fits into the overall transactional marketplace.  Many businesses rely on speculators speculating to reduce their risk.  For example, a farmer has to commit to purchasing seeds, fertilizer, equipment and a host of other expenditures in the spring, well in advance of selling crops in the fall.  If the farmer ends up having to sell her crops at a price below her costs, she could face financial ruin.  A speculator is willing to take the risk of a low price for the crops – and also intends to profit handsomely should the price be significantly higher – relieving the farmer of this burden.  Hence, if you “curb speculation” the unintended consequence is that you could burden certain businesses and individuals with risks they do not want.

We need to be thoughtful and not reactionary when it comes to policy.

Your thoughts are welcome.

Robert M. Bilkie, CFA

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