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Betting on black gold: Oil speculation and U.S. inflation (2020-2022)

Author

Listed:
  • Carlotta Breman

    (Delft University of Technology)

  • Servaas Storm

    (Delft University of Technology)

Abstract

Sharp increases in systemically important crude oil prices have been a major cause of the recent surge in the inflation rate in the U.S. This paper investigates the extent to which the increase in oil prices can be attributed to excessive speculation in the oil futures market. Our analysis suggests that excessive speculation in the crude oil market has been responsible for 24%-48% of the increase in the WTI crude oil price during October 2020-June 2022. These estimates translate into an oil price increase of around $18-$36 per barrel and an increase in the U.S. PCE inflation rate by circa 0.75 to 1.5 percentage points during the same period. We complement the analysis with an empirical investigation of the crude oil market which shows that (speculative) long non-commercial open-interest positions in oil futures have increased considerably relative to short non-commercial positions. We further find that higher futures prices for crude oil 'Granger-cause' oil spot prices, the futures prices of corn and soybeans and the fertilizer price. These econometric results show that oil speculators have to be held accountable for not just raising oil prices, but also driving up food commodity prices. We finally discuss measures to clamp down on excessive speculation in oil in order to eliminate its systemically adverse consequences for the U.S. economy.

Suggested Citation

  • Carlotta Breman & Servaas Storm, 2023. "Betting on black gold: Oil speculation and U.S. inflation (2020-2022)," Working Papers Series inetwp208, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp208
    DOI: 10.36687/inetwp208
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4565308
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    Cited by:

    1. Nikolaos A. Kyriazis, 2024. "Food Inflation Examination through the Dynamic Nexus between Olive Oil and Substitutes," Economies, MDPI, vol. 12(3), pages 1-13, February.
    2. Servaas Storm, 2023. "Profit inflation is real," PSL Quarterly Review, Economia civile, vol. 76(306), pages 243-259.

    More about this item

    Keywords

    inflation; oil prices; oil majors; spot and futures prices; speculation; Granger causality; Working's T-index; speculative pressure; commercial and non-commercial traders; open interest; index investor.;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies

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