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Quantifying the Speculative Component in the Real Price of Oil: The Role of Global Oil Inventories

  • Kilian, Lutz
  • Lee, Thomas K

One of the central questions of policy interest in recent years has been how many dollars of the inflation-adjusted price of oil must be attributed to speculative demand for oil stocks at each point in time. We develop statistical tools that allow us to address this question, and we use these tools to explore how the use of two alternative proxies for global crude oil inventories affects the empirical evidence for speculation. Notwithstanding some differences, overall these inventory proxies yield similar results. While there is evidence of speculative demand raising the price in mid-2008 by between 5 and 14 dollars, depending on the inventory specification, there is no evidence of speculative demand pressures between early 2003 and early 2008. As a result, current policy efforts aimed at tightening the regulation of oil derivatives markets cannot be expected to lower the real price of oil in the physical market. We also provide evidence that the Libyan crisis in 2011 shifted expectations in oil markets, resulting in a price increase of between 3 and 13 dollars, depending on the inventory specification. With regard to tensions with Iran in 2012, the implied price premium ranges from 0 to 9 dollars.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9297.

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Date of creation: Jan 2013
Date of revision:
Handle: RePEc:cpr:ceprdp:9297
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  1. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Risk premia in crude oil futures prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 9-37.
  2. Deren Unalmis & Ibrahim Unalmis & Derya Filiz Unsal, 2012. "On Oil Price Shocks: The Role of Storage," IMF Economic Review, Palgrave Macmillan, vol. 60(4), pages 505-532, December.
  3. Lutz Kilian & Bruce Hicks, 2013. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003–2008?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 385-394, 08.
  4. Christiane Baumeister & Lutz Kilian, 2011. "Real-Time Forecasts of the Real Price of Oil," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(2), pages 326-336, September.
  5. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
  6. David M Arseneau & Sylvain Leduc, 2013. "Commodity Price Movements in a General Equilibrium Model of Storage," IMF Economic Review, Palgrave Macmillan, vol. 61(1), pages 199-224, April.
  7. Giannone, Domenico & Reichlin, Lucrezia, 2006. "Does information help recovering structural shocks from past observations?," Working Paper Series 0632, European Central Bank.
  8. Christiane Baumeister & Gert Peersman, 2011. "The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market," Working Papers 11-28, Bank of Canada.
  9. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
  10. Christiane Baumeister & Lutz Kilian, 2012. "Real-Time Analysis of Oil Price Risks Using Forecast Scenarios," Working Papers 12-1, Bank of Canada.
  11. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
  12. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  13. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
  14. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
  15. James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 215-283.
  16. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
  17. repec:taf:jnlbes:v:30:y:2012:i:2:p:326-336 is not listed on IDEAS
  18. Eyal Dvir & Kenneth S. Rogoff, 2009. "Three Epochs of Oil," NBER Working Papers 14927, National Bureau of Economic Research, Inc.
  19. Bénédicte Vidaillet & V. D'Estaintot & P. Abécassis, 2005. "Introduction," Post-Print hal-00287137, HAL.
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