Speculators Don't Seem To Be Driving Up Oil Prices

See Are Speculators Gouging Us at the Pump? by Jerry Taylor and Peter Van Doren of Cato. Excerprt:

"If this [speculation] is going on we would expect to see some sort of inventory buildup. While crude inventories in the U.S. are increasing, they always increase at this time of year, and this year's increase is well within the normal range. More important, gasoline inventories are decreasing and decreasing much more rapidly than normal. Hence, there's no evidence that speculators are reducing the supply of crude or gasoline through increased storage.

Producers, however, could react in the same way to higher futures prices by decreasing current production to allow more future production at higher prices. Alas, we see no evidence of suspicious reductions in producer output that might give this story credence.

More formal statistical tests (known as "Granger-causality tests" to economists) examine the impact of traders' behavior on prices within futures markets. Do futures prices follow the bets taken by market participants or do those bets follow prices? A federal interagency task force undertook one such econometric analysis in 2008 and found that futures price changes from January 2000 to June 2008 preceded net position changes by any group of traders. An updated and more rigorous econometric study by economists Bahattin Buyuksahin and Jeffrey Harris found the same thing for July 2000-March 2009.

These findings undermine the claim that speculators' behavior increases gasoline prices. "The lack of even Granger-causality (let alone true causality) between positions and prices undermines the prospect that speculative trading has driven recent dramatic price swings in the crude oil futures market," concludes Buyuksahin and Harris. "Rather, we believe it more likely that both prices and positions react to the same factors, such as global demand and supply.""