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Why the Oil Futures Market did not Contribute to High Oil Prices

By James Hamilton | Thu, 26 July 2012 22:13 | 1

A recent study by Luciana Juvenal and Ivan Petrella suggests that the financialization of oil futures markets contributed significantly to the surge in oil prices after 2003. Lutz Kilian, Professor of Economics at the University of Michigan, questions their analysis and highlights that their paper actually does not shed any light on the role of Wall Street speculation.

The question of how much speculative pressures contributed to the surge in the real price of oil between 2003 and mid-2008 continues to be hotly debated in policy circles. A common view among policy makers is that excessive speculation driven by the financialization of oil futures markets played a key role in causing oil prices to peak at unprecedented levels in mid-2008. This interpretation has been driving recent policy efforts to tighten the regulation of oil derivatives markets in the U.S. as well as abroad. In sharp contrast, the academic literature on this subject is virtually unanimous that financial speculation played no independent role in this episode. One of the rare studies claiming some success in pinning down the effects of financial speculation has been a working paper by Luciana Juvenal and Ivan Petrella (2012) originally published by the St. Louis Fed in 2011. This study has received considerable media attention, but what does it really show and how were its surprising conclusions arrived at?

Based on estimates of a structural vector autoregressive (VAR) model of the global market for crude oil, Juvenal and Petrella (2012) report that, overall, financial speculation (as captured by what I will refer to as the “hybrid speculative shock” and what they call somewhat imprecisely the “speculative shock”) accounts for about 15% of the surge in the real price of oil from 2003 to mid-2008. This compares with 9% attributed to oil supply disruptions (or “flow supply shocks”) and with 58% attributed to oil demand shocks associated with global business cycle fluctuations (or “flow demand shocks”) – not 40% as has been widely, but incorrectly reported in the media on the basis of the Juvenal-Petrella study (see Figure 1 below).

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The guest post was written by. Lutz Kilian

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  • Earl Richards on July 27 2012 said:
    Chinese demand, global oil markets, Obama, OPEC, Iran,refinery fires, hurricanes, the euro zone, the laws of supply and demand, Saudi Aramco and so on, are not responsible for high oil and gasoline prices, which are causing the recession and could lead to a depression. The oil price is dictated by the fraudulent "round-trip" trades of the "dark pool" trading in the IntercontinentalExchange (ICE) in Atlanta. The international Big Oil/big banking cabal, or an international gang of criminals, owns ICE. ICE operates outside of US law, considers itself to be above the law, can commit fraud and law enforcement cannot do anything. The Commodity Futures Trading Commission has no jurisdiction over ICE, influenced by Big Oil. ICE's energy traders and speculators can ratchet-up the oil price anytime they feel it, for their own profits and on the behalf of Big Oil, using "round-trip" trades. Google the "Global Oil Scam." The ICE has the "London Loophole" and the NYMEX has the "Dubai Loophole." "Paper oil" and the crude oil futures markets have to done away with. Cash at the wellhead. Over 75% of crude oil futures trading takes place in the ICE. ICE Futures Europe is a subsidiary of ICE. The NYMEX is a decoy market. ICE is a super Enron. The "Enroning" of California was a test-market for ICE. Enron Online was a test-product for ICE's online-trading platform. Oil is too critical a resource to be controlled and manipulated by greedy speculators, greedy traders, greedy refiners and greedy corporations. Cash on the barrelhead. To obtain a fair oil price, Senator Sanders and the other senators have to investigate ICE and seize immediately the trading records of ICE, before they are destroyed and end the specter of ICE and end this crime against humanity. Google the "$2.5 Trillion Oil Scam - slideshare."

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