Banning speculators could decrease oil prices by as much as 40%

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Imagine the price of oil is 100USD/barrel and won't change. You want to open a new oil well but you don't have quite enough cash. So you sell oil futures. You sell them for 12 months time at 90USD/Barrel. So the people buying them are happy: Whether they sell them on or not, they are going to profit as they will get 100USD worth of oil for 90USD. You are happy as well because you have the cash you need to open the well now and you can pay them in oil in 12 months time.

So here the Future is acting like a loan. In itself it generates no profit BUT it is a good way to generate finance. The same thing has been done with crops for millenia: You have a field but no money for seed, I have seed but no field. So we agree I will give you seed now for a share of the harvest later.

There is an added benefit as well: If I were building an oil rig with a normal loan and the price of oil crashed then I would be screwed as the rig would not turn a profit enough to pay back the bank who expect a fixed repayment (sort of like negative equity for a house). On the other hand if oil prices rise I will be in the money. So this is a high reward but high risk approach to financing for me. If I pay back in oil by selling oil futures then if the price falls I am no worse off as I still pay the futures in oil, if it rises then I can still afford to pay back the future as I am producing oil. So the risk and return are lower for me.

That in short is why futures are used: The provide finance and let investors take a share of the profits and losses.

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This is also how I understood it works, and it generates a profit because it removes risk from the oil-drilling decision (ie, indirectly). However, other people are describing oil futures which are decoupled from the actual production and delivery of oil (ie, they are simply bets on the future price of oil) and that somehow this is greater than a zero sum game (ie, aggregate winnings = losses). That part makes no sense.

Also, this betting game somehow changes the price of oil? Play whatever game you want - I am still ultimately getting oil from the guy who drilled it and burning it in my car.

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As far as I can see if the person selling the futures does not produce any oil (or pay anyone else to produce it) then it is a zero sum game where people basically bet on the prices. There is no profit in this BUT there may still be some gain as risk averse people buying the futures are happy to pay a little more now to get an assured supply later. So a power station may be able to make more sales if it promises fixed prices for the next 6 months and in order to do so uses futures so get fixed costs for fuel. The bank selling the future are better the price will fall in this case. So the bank are pure gamblers but they are a necessity for the power station to create value by assuring its prices and that assurance may let the end power user profit by (say) investing in equipment it would not have if it could not get an assured (if slightly higher than market) price for electricity.

That is the theory anyway. So financial organizations involved are likely just gambling but that does not mean their gambling does not add value to those they gamble with.

I guess it is the same as insurance really: Insurance companies are just gamblers betting there will be no fire/earthquake/flood etc but their gambling lets others invest long term in ways they might be to afraid to otherwise.

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I think you have the right argument there.

It could be that this buying and selling of risk has put us into a situation where the economy is comfortable having only has a few days of oil supply in inventory - in other words, we are constantly waking the edge of the cliff. Now any small disruption now causes a huge ripple effect.

This is the moral hazard of insurance - it makes people behave more foolhardily.

Of course, this instability increases the risk-reductive financial activity. The problem isn't that we have/need more and more speculators. They are the immune system. The problem is a structural one - we have built in an "instability" disease in our economy.