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

37 Pages Posted: 4 Apr 2012

See all articles by Bassam Fattouh

Bassam Fattouh

University of Oxford - Oxford Institute for Energy Studies

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Lavan Mahadeva

Oxford Institute for Energy Studies

Date Written: March 2012

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.

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

JEL Classification: G15, G28, Q43

Suggested Citation

Fattouh, Bassam and Kilian, Lutz and Mahadeva, Lavan, The Role of Speculation in Oil Markets: What Have We Learned so Far? (March 2012). CEPR Discussion Paper No. DP8916. Available at SSRN: https://ssrn.com/abstract=2034134

Bassam Fattouh

University of Oxford - Oxford Institute for Energy Studies ( email )

57 Woodstock Road
Oxford, OX2 6FA
United Kingdom

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lavan Mahadeva

Oxford Institute for Energy Studies ( email )

57 Woodstock Road
Oxford, Oxfordshire OX2 6FA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/lavanmahadeva/

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