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The Role of Speculation in the Determination of Energy Prices

  • Umar M. Mustapha

    (Faculty of Engineering and Surveying, University of Southern Queensland, Australia)

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    This paper seeks to evaluate the role of speculation in the determination of global energy prices. Designed as a case study, five major oil producing countries are the focus of this positivistic study: Nigeria, Mexico, Iran, Saudi Arabia and Russia. Data is collected through secondary sources. One-tailed and two-tailed tests carried out on the relationship between speculation and oil prices for each of the five countries yield critical values lower than the alpha. Thus, the null hypothesis is rejected in favor of the alternate hypothesis that ‘there is a significant and positive correlation between commodity derivatives (oil futures) and oil prices’. The study found that while there is a positive relationship between speculation in the commodity derivatives market and oil prices, such a relationship is at best weak and attributes the high prices to several factors, including political instability, high and rising demand from overheating economies such as China, and falling production levels, among others. The paper emphasized the need to enhance the physical and financial transparency of the energy market, as well as the operation of the supply and demand fundamentals, including regulating against insider trading and market manipulation practices, strengthening the reporting requirements of the dealers in the market, and strengthening capital adequacy and margin requirements.

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    Article provided by Econjournals in its journal International Journal of Energy Economics and Policy.

    Volume (Year): 2 (2012)
    Issue (Month): 4 ()
    Pages: 279-291

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    Handle: RePEc:eco:journ2:2012-04-7
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    1. Gromb, Denis & Vayanos, Dimitri, 2010. "Limits of Arbitrage: The State of the Theory," CEPR Discussion Papers 7738, C.E.P.R. Discussion Papers.
    2. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    3. Fan, Ying & Xu, Jin-Hua, 2011. "What has driven oil prices since 2000? A structural change perspective," Energy Economics, Elsevier, vol. 33(6), pages 1082-1094.
    4. Juncal Cuñado & Fernando Pérez de Gracia, . "Do Oil Price Shocks Matter? Evidence For Some Europesan Countries," Working Papers on International Economics and Finance 01-02, FEDEA.
    5. Bryan R. Routledge & Duane J. Seppi & Chester S. Spatt, 2000. "Equilibrium Forward Curves for Commodities," Journal of Finance, American Finance Association, vol. 55(3), pages 1297-1338, 06.
    6. Peter C. B. Phillips & Jun Yu, 2010. "Dating the Timeline of Financial Bubbles during the Subprime Crisis," Cowles Foundation Discussion Papers 1770, Cowles Foundation for Research in Economics, Yale University.
    7. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.
    8. Denis Gromb & Dimitri Vayanos, 2010. "Limits of Arbitrage," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 251-275, December.
    9. repec:skb:wpaper:cofie-07-2009 is not listed on IDEAS
    10. repec:pal:imfstp:v:47:y:2001:i:3:p:1 is not listed on IDEAS
    11. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
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