Sunday, March 25, 2012

When oil prices rise the first cry from politicians and other scoundrels is "IT'S THE SPECULATORS!!". But is it TRUE?

This research paper surveys  published papers on the topic of speculation in the oil trading commodity markets. Speculation is the "knee-jerk" response of politicians when it comes to increases in oil prices. (Is it not funny that speculation does not get blamed for LOWER oil prices??) Here is the Abstract from the paper:
"A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to regulate oil futures markets. This survey reviews the evidence supporting this view. We identify six strands in the literature corresponding to different empirical methodologies and discuss to what extent each approach sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets."
 Find paper HERE.  (HT: Econobrowser for link)

http://www-personal.umich.edu/~lkilian/milan030612.pdf
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