Black Gold and Fool's Gold: Speculation in the Oil Futures Market

O n its face, nothing looks more like a classic bubble than the accelerating inflation of the oil price between 2003 and mid-2008, followed by a sudden collapse in late 2008. Starting from $30 per barrel, the price climbed fitfully but persistently to $100 per barrel at the end of 2007 and then shot up above $140 by July 2008, only to collapse below $40 by the end of 2008. Clearly the price spiked dramatically, but was it a bubble? A large number of people have pointed their fingers at the growing flow of money into financial instruments tied to the oil price. These flows, they argue, pushed the oil price up and away from its fundamental level. The bubble burst when the general financial market collapse put an end to this dynamic. Some who make this argument speak with blanket disapproval of “speculation” and “speculators” because they are not part of the “real” oil business. Some go further still and suggest that financiers specifically “manipulated” the oil market. But the theory that the oil price spike was a speculative bubble driven by financial flows requires neither disapproval of purely financial investments in oil nor a judgment about motives. The thing about asset bubbles is that they arise naturally, so to speak, in any economy sophisticated enough to develop financial assets. Among economists there is a prevailing skepticism toward the view that the oil price spike was a bubble. They point to the fact that the underlying fundamentals of supply and demand changed significantly in this period.

[1]  Eduardo S. Schwartz.  The stochastic behavior of commodity prices: Implications for valuation and hedging , 1997 .

[2]  H. Hotelling.  The economics of exhaustible resources , 1931, Journal of Political Economy.

[3]  Zvi Bodie,et al.  Risk and Return in Commodity Futures , 1980 .

[4]  John Parsons,et al.  Alternative Models of Uncertain Commodity Prices for Use with Modern Asset Pricing Methods , 1998 .

[5]  John Parsons,et al.  Update on the Cost of Nuclear Power , 2009 .

[6]  M. A. Adelman,et al.  The Economics of Petroleum Supply , 1993 .

[7]  R. Greer.  Conservative Commodities , 1978 .

[8]  J. Keynes,et al.  Bank for International Settlements , 1934, International Organization.

[9]  Using Futures Prices to Filter Short-Term Volatility and Recover a Latent, Long-Term Price Series for Oil , 2006 .

[10]  Eduardo S. Schwartz,et al.  Short-Term Variations and Long-Term Dynamics in Commodity Prices , 2000 .

[11]  Gary B. Gorton,et al.  Facts and Fantasies about Commodity Futures , 2004 .

[12]  A. Neuberger,et al.  Hedging Long-Term Exposures with Multiple Short-Term Futures Contracts , 1999 .

[13]  Michael Greenstone,et al.  Quasi-Experimental and Experimental Approaches to Environmental Economics , 2007 .

[14]  A. Ellerman,et al.  Over-Allocation or Abatement? A Preliminary Analysis of the EU Ets Based on the 2005 Emissions Data , 2006 .

[15]  James A. Overdahl,et al.  Fundamentals, Trader Activity and Derivative Pricing , 2008 .

[16]  Eduardo S. Schwartz,et al.  Stochastic Convenience Yield and the Pricing of Oil Contingent Claims , 1990 .

[17]  Richard S. Eckaus.  The oil price really is a speculative bubble , 2008 .

[18]  John Parsons,et al.  MATURITY STRUCTURE OF A HEDGE MATTERS: LESSONS FROM THE METALLGESELLSCHAFT DEBACLE , 1995 .