September 28, 2016
We have seen a number of sharp swings in oil prices over the last two decades. Clearly the underlying fundamentals of the market are the main factor in determining the price, but the fact that Wall Street-types spend tens of billions of dollars speculating on the stuff can also play a role.
NPR assured us otherwise in a Morning Edition segment today. They gave a comment from an economist who said the impact of speculation was essentially zero, effectively mocking all the folks who complained about it.
This position is not one universally held by economists. For example, this paper from the St. Louis Federal Reserve Bank analyzed recent movements in oil prices. It found that speculation had the effect of exaggerating movements in both directions by around 15 percent. The implication is that when oil prices hit their all time high of $150 a barrel in 2008, speculation might have been responsible for more than $20 of this price. This would cost U.S. consumers more than $12 billion over the course of a year if the impact lasted that long. This is equal to 0.08 percent of GDP at the time or more than one third of the gains the International Trade Commission projects for the Trans-Pacific Partnership.
While the paper still supports the idea that the fundamentals of supply and demand are the main factors determining price, it does provide evidence that speculation can play an important role. If the analysis in this paper is correct, then people would not be wrong to be bothered by speculation in the oil market.
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