It never fails. Every time oil prices rise or fluctuate, politicians are quick to blame speculators trading oil futures contracts for the high prices and price swings. If politicians are correct about speculators and they were able to pass legislation outlawing all oil futures trading, what would happen to the volatility of oil prices in the future—would it be higher or lower? Probably much higher if we look at the historical volatility of the prices for onions, which is one of the only commodities that has no futures market, thanks to legislation passed by Congress in 1958 that banned all futures trading in onions.
The chart above displays the monthly percentage changes in oil and onion prices over the last decade, and clearly shows that despite the ban on onion speculation, the volatility of onion prices has actually been significantly higher than the volatility of oil prices, even though thousands of speculators are taking positions every day on the future price of oil. Futures markets for oil and other commodities that allow speculation play a very beneficial role in the economy by smoothing out commodity prices over time. That was the main motivation for starting the Chicago Board of Trade back in 1848—to stabilize volatile commodity prices with futures trading. The extreme price volatility of onions in the chart above gives us an idea of how wildly oil prices might fluctuate in the future without the stabilizing effects of speculative trading in oil futures contracts—and that’s a “speculation-free” future that would make us all much worse off than we are today.