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The Role of Speculation in Oil Markets: What Have We Learned So Far?

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  • Fattouh, Bassam
  • Kilian, Lutz
  • Mahadeva, Lavan

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.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8916.

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Date of creation: Mar 2012
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Handle: RePEc:cpr:ceprdp:8916

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Keywords: Financialization; Fundamentals; Futures market; Oil price; Speculation; Spot market;

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References

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