No, Speculators Did Not Cause Oil Prices to Rise
As everyone who drives and buys gas knows, the price of gasoline (and diesel fuel) have been dropping steadily for the past few weeks. Why is this? I ask, because several weeks ago the airwaves and the internet were cluttered with liberal illiteratti bawling about speculators driving up the price of oil.
So what happened? I mean, if the speculators, whoever they are, actually were driving up the price of crude, why have they stopped? And why are the price of crude and distillate products now dropping?
The answer is that it was government policies and economic/market realities that drove up the price of crude oil, both earlier this year and during the 2003 to 2008 period as well. And it is market realities that are responsible for the recent decline in oil prices as well.
The proof of this comes from a paper published six weeks ago by three experts in the field of international finance and international energy markets. That paper can be found here. And here are the authors:
Dr. Bassam Fattouh holds a Ph.D. in Economics from the London University, a Masters degree in Developmental Economics, and is the Director of the Oil and Middle East Programme at the Oxford Institute for Energy Studies; a fellow at St Antony’s College, Oxford University; and a Professor at the School of Oriental and African Studies, University of London.
Dr. Lutz Kilian holds a Ph.D. in Economics from the University of Pennsylvania and his Masters in Development Banking from American University. He has worked for the US Federal Reserve, the European Central Bank, the International Monetary Fund and the World Trade Organization, among others.
Dr. Levan Mahadeva earned his Ph.D. at the European University Institute and his undergraduate degree at Trinity College, Cambridge. He is Senior Research Fellow at the Oxford Institute where his research concerns the interaction of energy markets with the macro-economy and international finance. His work is on issues such as how high energy prices affect demand in consuming countries, what constitutes good macroeconomic policy in energy exporting countries, and how global financial market conditions affect energy prices.
The conclusion of the three Ph.D. economists with a combination of over 50 years experience in the field of international economics and energy markets that speculation did not cause the rise in oil prices is best given here in the Abstract:
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.
Please note that in all of the criticism of oil prices and the role of speculators, both here at SAB and in the mainstream media, there has been no mention of the difference between the spot market and the crude oil futures market. In other words, none of the critics, from Obama (and O’Reilly!) on down really knows what they are talking about or how these markets function, and instead are merely spouting a regurgitated version of the standard, populist class warfare rhetoric.
Admittedly, this stuff isn’t for everyone. Reading and understanding this material, all 34 pages of it, requires not only a knowledge of basic economics and the theoretical and functional roles of markets, but a definite interest in the subject and a good deal of patience as well. Still, for those willing to invest the effort, and unwilling to accept at face value the word of craven politicians, this paper is both informative and authoritative.
The speculators – whoever they might have been – did NOT cause the rise in crude oil and gasoline prices!Tags: Economy, oil