In order to reduce excessive speculative trading in oil and natural gas, US Senator Ron Wyden has introduced the Stop Tax-breaks for Oil Profiteering (STOP) Act of 2009.
The legislation would end tax breaks that non-commercial speculators currently enjoy, and tax all profits at the same rate as ordinary income for tax-paying investors. Oil and gas trading gains would be treated as unrelated business income for tax-exempt investors.
According to Wyden, commodities markets have been flooded with hundreds of billions of dollars in speculative investments in oil and gas commodities, which affects volatility in the markets and high oil and gas prices for consumers.
“The tax code has fueled an explosion of speculators who are distorting oil and gas markets and driving up prices for everybody,” said Wyden. “The STOP Act will take away the unfair tax breaks for speculators like hedge funds and help drive away anyone looking to make a fast buck by gaming the market.”
Under current tax law, commercial buyers, such as airlines, trucking companies, and independent refiners, who need to buy oil or other fuels or futures contracts in order to run their businesses pay ordinary income tax on any profits from such trading. By contrast, speculators often pay lower capital gains rates on their oil and gas trading profits. Unlike commercial businesses that try to consume less oil when prices rise, speculators can react to rising prices by buying more oil and futures contracts.
Wyden considers that this distorts the normal supply-demand balance of the markets and increases the price of the commodity. Tax-exempt investors, such as pension funds and university endowments, pay no taxes at all on these investments. Under the STOP Act, tax-exempt entities would be required to pay unrelated business income tax on such investments.
In 2000, speculative trading in the oil futures markets accounted for 37% of crude oil trading on the New York Mercantile Exchange. By mid-year last year, that number had grown to more than 70%.
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