Working Paper: NBER ID: w18951
Authors: Christopher R. Knittel; Robert S. Pindyck
Abstract: The price of crude oil in the U.S. never exceeded $40 per barrel until mid-2004. By 2006 it reached\n$70, and in July 2008 it peaked at $145. By late 2008 it had plummeted to about $30 before increasing\nto $110 in 2011. Are speculators at least partly to blame for these sharp price changes? We clarify\nthe effects of speculators on commodity prices. We focus on crude oil, but our approach can be applied\nto other commodities. We explain the meaning of "oil price speculation," how it can occur, and how\nit relates to investments in oil reserves, inventories, or derivatives (such as futures contracts). Turning\nto the data, we calculate counterfactual prices that would have occurred from 1999 to 2012 in the absence\nof speculation. Our framework is based on a simple and transparent model of supply and demand in\nthe cash and storage markets for a commodity. It lets us determine whether speculation is consistent\nwith data on production, consumption, inventory changes, and convenience yields given reasonable\nelasticity assumptions. We show speculation had little, if any, effect on prices and volatility.
Keywords: Commodity Price Speculation; Crude Oil Prices; Speculation and Prices
JEL Codes: G13; L71; Q40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| speculation (D84) | oil prices (L71) |
| speculation (D84) | price volatility (G13) |
| speculation (D84) | peak prices (L97) |
| speculation (D84) | dramatic price increases (P22) |
| fundamental shifts (P39) | oil prices (L71) |
| speculation (D84) | inventories (G31) |
| inventories (G31) | oil prices (L71) |
| futures-spot spreads (G13) | oil prices (L71) |
| speculation (D84) | price elasticities (D12) |