Thursday, August 13, 2009

A Tax on Speculators

A proposed bill to tax oil futures and options speculation might be a lot easier to get through the House of Representatives than to actually implement. Representative Peter DeFazio from Oregon and another 29 reps are backing legislation that would add 0.2% to each oil futures contract and 0.5% to every options contract traded by 'non commercial' traders for non-hedging purposes. The idea is to use the tax to fund transportation projects. While I applaud the intention - provided the money is used not just for repairing the crumbling highway infrastructure but also for improving trains and other public transportation - the practice is likely to be downright impossible to implement and monitor. The CFTC can barely figure out who is commercial and who is non commercial, let alone try and separate out the activities of these participants. What if an investment bank acts as the counterparty to a commercial oil company buying futures, then turns that position around for profit? Position limits on the exchanges are a more logical solution. Accountability limits on Nymex have been sorely abused of late, and the exchanges already have a hard time figuring these out. Just last year oil trading firm Vitol was thought to have amassed 11% of the contracts traded on Nymex. The Commodity Markets Oversight Coalition goes as far as recommending to Congress that they stop allowing firms to trade consumer commodities as a US dollar hedge. There is a lot of noise around oil speculation currently, but a tax is probably the worst idea. Maybe regulators should force the investment banks to ring-fence all commodities trading within one subsidiary. In other words, Goldman Sachs could only trade and speculate within J. Aron, and Citi within Phibro. It's a thought.

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