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

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  • Ron Alquist
  • Olivier Gervais

Abstract

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 ofopen 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.

Suggested Citation

  • Ron Alquist & Olivier Gervais, 2013. "The Role of Financial Speculation in Driving the Price of Crude Oil," The Energy Journal, , vol. 34(3), pages 35-54, July.
    • Handle: RePEc:sae:enejou:v:34:y:2013:i:3:p:35-54
    DOI: 10.5547/01956574.34.3.3
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    More about this item

    Keywords

    Oil price; Futures market; Fundamentals; Speculation; Financialization;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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