NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Simple Economics of Commodity Price Speculation

Christopher R. Knittel, Robert S. Pindyck

NBER Working Paper No. 18951
Issued in April 2013
NBER Program(s):   AP   EEE   EFG   IO

The price of crude oil in the U.S. never exceeded $40 per barrel until mid-2004. By 2006 it reached

$70, and in July 2008 it peaked at $145. By late 2008 it had plummeted to about $30 before increasing

to $110 in 2011. Are speculators at least partly to blame for these sharp price changes? We clarify

the effects of speculators on commodity prices. We focus on crude oil, but our approach can be applied

to other commodities. We explain the meaning of "oil price speculation," how it can occur, and how

it relates to investments in oil reserves, inventories, or derivatives (such as futures contracts). Turning

to the data, we calculate counterfactual prices that would have occurred from 1999 to 2012 in the absence

of speculation. Our framework is based on a simple and transparent model of supply and demand in

the cash and storage markets for a commodity. It lets us determine whether speculation is consistent

with data on production, consumption, inventory changes, and convenience yields given reasonable

elasticity assumptions. We show speculation had little, if any, effect on prices and volatility.

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Document Object Identifier (DOI): 10.3386/w18951

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