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Speculation and Recent Volatility in the Price of Oil

25 Pages Posted: 16 Oct 2009  

James Thomas Einloth

Federal Deposit Insurance Corporation

Date Written: August 1, 2009


As the price of crude oil doubled from June 2007 to June 2008, suspicion grew that price was being driven higher by speculation rather than fundamental supply and demand. After having seen the price drop 70 percent from its peak, this explanation may appear more plausible than ever. This paper introduces a new methodology that uses convenience yield – imputed from futures prices – to detect the influence of speculation on the spot price of a storable commodity. The paper finds the evidence inconsistent with speculation having played a major role in the rise of price to $100 per barrel in March 2008. However, the evidence suggests that speculation did play a role in its subsequent rise to $140. Finally, the analysis finds that the collapse in price was caused by an unanticipated decline in demand rather than by speculators unloading their positions. This implies that, absent the discovery of vast new sources of energy, high oil prices will return with the recovery of the global economy.

Keywords: oil, petroleum, futures price, speculation, convenience yield, bubble

JEL Classification: G13, Q33, Q4

Suggested Citation

Einloth, James mname, Speculation and Recent Volatility in the Price of Oil (August 1, 2009). Available at SSRN: or

James Einloth (Contact Author)

Federal Deposit Insurance Corporation ( email )

550 17th Street NW
Washington, DC 20429
United States
202-898-8545 (Phone)

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