Actions that can be taken by the CFTC to insure that crude oil prices respond to physical supply and demand, rather than to speculation and manipulation.
1. Permit delivery on the NYMEX Crude Oil Futures Contract of any crude oil imported into the United States at any port of entry.
At present, delivery on the NYMEX Contract can be made only at Cushing Oklahoma. No pipeline capacity exists to transport more than a few thousand barrels of the 10,000,000 barrels of oil imported every day to Cushing. Moreover, the NYMEX Contract permits the delivery on the Contract of only three grades of foreign crude. As a result, the price of imported oil is set by an artificial mechanism that permits speculation and manipulation to override price movements that would normally result from changes in physical supply and demand. An easy and quick first step would be to designate the Louisiana Offshore Oil Port (the LOOP) as a delivery point. The LOOP facilities make Cushing look like a corner Quick Stop.
2. Classify all non-producers and non-users of crude oil as Non-Commercial Speculators, including counterparties in swap transactions, and subject them to position limits.
In the recent past, the CFTC has not only failed to carry out its role under the Commodity Exchange Act, it facilitated the speculative run-up in crude prices to $150 per barrel by granting Wall Street banks an exemption from speculative position limits (at the request of Goldman Sachs).
3. Establish a system that automatically resets margin requirements on crude oil futures commensurate with price movements. This should be done on a logarithmic scale such that a doubling of oil price over a period of less than five years would result in a 100% margin requirement.
During the time that crude oil more than tripled in price, margin requirements remained below 10%. There is little left to be said about the ruin left in the wake of somnolent regulators, other than to note that neither the Fed nor the CFTC ever used margin requirements to cool speculation, although it remains as one of the most basic tools to evolve from the great depression.
4. Appoint people to the CFTC whose experience isn't limited to gaming the system.
Contributors to the current mess have been appointed to regulatory positions.