Betting on Black Gold: Oil Speculation and U.S. Inflation (2020-2022)

Sharp increases in systemically important crude oil prices have been a major cause of the recent surge in the inflation rate in the U.S. This paper investigates the extent to which the increase in oil prices can be attributed to excessive speculation in the oil futures market. Our analysis suggests...

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Bibliographic Details
Published in:International journal of political economy 2023-04, Vol.52 (2), p.153-180
Main Authors: Breman, Carlotta, Storm, Servaas
Format: Article
Language:English
Subjects:
Commercial and noncommercial traders
Crude oil
Crude oil prices
Energy economics
Futures
Granger causality
index investors
Inflation
Inflation rates
oil majors
oil prices
open interest
Speculation
speculative pressure
spot and futures prices
Working's T-index
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Summary:Sharp increases in systemically important crude oil prices have been a major cause of the recent surge in the inflation rate in the U.S. This paper investigates the extent to which the increase in oil prices can be attributed to excessive speculation in the oil futures market. Our analysis suggests that excessive speculation in the crude oil market has been responsible for 24%-48% of the increase in the WTI crude oil price during October 2020-June 2022. These estimates translate into an oil price increase of around $18-$36 per barrel and an increase in the U.S. PCE inflation rate by circa 0.75-1.5% points during the same period. We complement the analysis with an empirical investigation of the crude oil market, which shows that (speculative) long noncommercial open-interest positions in oil futures have increased considerably relative to short noncommercial positions. We further find that higher futures prices for crude oil "Granger-cause" oil spot prices, the futures prices of corn and soybeans and the fertilizer price. These econometric results show that oil speculators have to be held accountable for not just raising oil prices, but also driving up food commodity prices. We finally discuss measures to clamp down on excessive speculation in oil in order to eliminate its systemically adverse consequences for the U.S. economy.
ISSN:0891-1916
1558-0970
DOI:10.1080/08911916.2023.2238565