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The Role of Financial Speculation in Driving the Price of Crude Oil

As financial firms have increased their positions in the oil futures market during the past ten years, oil prices have increased dramatically as well. The coincidence of these two events has led some observers to argue that financial speculation caused the oil-price increases. Yet several arguments cast doubt on the validity of this claim. For example, although the quantity of oil implied by the number of open futures contracts is much larger than U.S. daily oil consumption, comparing these two statistics is misleading because not all paper oil is immediately deliverable. In addition, changes in financial firms� positions do not predict oil-price changes, but oil-price changes predict changes in positions. Other explanations for the oil-price increases include macroeconomic fundamentals such as increased demand from emerging Asia. Of these explanations, the most consistent with the facts relates the oil-price increases to a series of positive demand shocks emanating from emerging Asia.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Investment and Finance – Corporate Strategy; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
G13 - Contingent Pricing; Futures Pricing; option pricing
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: Oil price, Futures market, Fundamentals, Speculation, Financialization

DOI: 10.5547/01956574.34.3.3

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Published in Volume 34, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.