Congress is looking for a scapegoat for high oil prices.  Just as they did during the Great Depression, speculators fit the bill.  Herbert Hoover despised speculators and attacked them at every opportunity*.  As with politicians today, Hoover failed to recognize that speculators serve some very necessary functions in the free market.  Just as Hoover's attempts to manipulate the wheat markets were a contributing factor to the Depression, attempts to ban futures trading in oil could have disastrous, unintended consequences.

Prices are determined by competition between buyers and between sellers.  Buyers bid against one another and cause prices to go up.  Sellers, on the other hand, try to attract buyers by underbidding their competition.  A temporary equilibrium is reached when the price that buyers are willing to pay matches the price at which sellers are willing to sell, and the market is cleared of that product.  Like any other buyer, speculators, that is those individuals who are trying to buy a product at a lower price to sell later at a higher price, drive the price of products up.  When speculators are sellers, more of the product comes onto the market and they drive the price of the product down.  Thus, speculators help to drive the market towards equilibrium and minimize wild price fluctuations.

In addition, speculators help regulate the amount of good available on the market and serve as insurance against shortages.  As they bid the price of products up, other buyers are bid out of the process.  This ensures that only those who have a need for a product buy it.  For example, during natural disasters, entrepreneurs who raise prices are accused of "gouging."  However, these high prices actually protect against shortages.  Let's say the power is out.  If ice is $10 a bag, you'll probably only buy enough to keep the stuff freezer from thawing out immediately.  If ice is 99 cents a bag, you'll do that, plus buy a bunch to keep your beer cold, and buy some extra just in case.  Who cares if it melts?  After all, its cheap!!  As Robert F. Murphy points out, while speculators are a free market mechanism which protects us from shortages, government efforts to do the same hinder the market's ability to regulate itself. 

Finally, futures trading allows businesses to forecast and control costs by locking in products at a set price.  If you were a transportation company that had locked in the price of your fuel months ago, you'd be looking pretty right now.  Not only that, but many businesses are dependent on futures trading.  For example, farmers may sell their crops at a set price on the futures so that they can get the money up front that they will need to grow the crop, as well as protect themselves from unforeseen market changes.

Besides all of these theoretical arguments, the idea that speculators are driving the rise in the price of oil simply makes no practical sense.  Oil speculators must sell their contracts or take physical possession of the oil.  Hence, they must sell the oil to make a profit.  If they get stuck with it, it does them no good.  As we have seen, as they sell the oil that will drive the price down.  Those who accuse speculators of driving up the price of oil are only taking half of the real world equation into account. 

If they're looking for someone to demonize for the high price of oil, Congress should simply look in the mirror.  Government intervention causes distortions in the market.  Prices are an indication of the scarcity of goods and resources.  We have no idea what the real price of oil should be because of massive government intervention, some of which helps keep the price artificially low and some of which drives the price up.  Thus, entrepreneurs are hindered in their efforts to determine where to allocate resources in the energy markets.  Should they expand efforts to explore, including researching new drilling techniques?  Or should they devout more resources to research and develop alternative energies?  They just don't know because their indicators, prices, are so out of whack with reality.  This has led us to the point that instead of a gradual change in energy production and consumption patterns, we now face the very real possibility of an abrupt disruption and a serious crisis.  If you are mad about the price of gas now, what are you going to do when it is rationed or simply not available at all?

So what should the government do?  Absolutely nothing.  In fact, not only should it do nothing, it should quit doing what it is doing right now.  That is, it should let the free market work.  Unfortunately, this is very unlikely to happen.  Already congress is considering measures to "rein in" the energy markets.  Not only is this a mistake, it reveals the hubris of these politicians. 

Banning futures trading on American exchanges could drive the trade overseas.  Already, Dubai, Venezuela, and Russia are contemplating opening such markets.  If these markets take off, it would be another blow against the dollar as the world's reserve currency.  Since oil is mostly traded in dollars, the United States is able to export much of the Fed's monetary inflation.  The majority of dollars that oil producing nations receive from oil sales are held in reserve by their central banks.  It is estimated that the majority of the world's dollars are actually held outside of the United States.  If the dollar loses this reserve currency status, there will be very little reason for other nations to hold dollars.  If that happens and the world's currency markets are flooded with dollars previously held in reserve, well, when it comes to price inflation, you ain't seen nothing yet.  The inflationary chickens will come home to roost and with a vengeance.

Simply put, the high price of oil is due to two factors: monetary inflation and demand outstripping supply.  In nominal terms, the price of oil has risen nearly four times as fast in dollars as it has in euros.  You can thank the Fed for that.  However, in real terms, demand is simply overpowering supply.  The world produces roughly 85-86 million barrels of oil a day.  Demand is 87 million per day and rising.  The difference is made up through sythentic production and inventory depletion.

This does not mean that the price of energy is destined to rise?  Maybe; maybe not.  If left to its own devices, the market could solve the problem.  Unfortunately, politicians have crippled the market process and cost us valuable time.  Regulating the oil futures market would have one more crippling effect.  Instead of regulating the free market, politicians should regulate themselves.

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*What were the consequences of Hoover's attacks on speculators?  As Murray Rothbard explains in America's Great Depression, restrictions on short selling contributed to the stock market's decline:

"As early as mid-July, Hoover returned to a favorite theme: attacking short-selling, this time the wheat market. The short-selling speculators were denounced for depressing prices and destroying confidence; their unpatriotic "intent is to take a profit from the losses of other people"—a curious charge, since for every short seller there is necessarily a long buyer speculating on a rise. When the crisis came in the fall, the Stock Exchange authorities, undoubtedly influenced by Hoover's long-standing campaign against such sales, restricted short selling. These restrictions helped drive stock prices lower than they would have been otherwise, since the short-seller's profit-taking is one of the main supports for stock prices during a decline."