Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/66964 
Year of Publication: 
2011
Series/Report no.: 
Bank of Canada Discussion Paper No. 2011-6
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Over the past 10 years, financial firms have increased the size of their positions in the oil futures market. At the same time, oil prices have increased dramatically. The conjunction of these developments has led some observers to argue that financial speculation caused the run-up in oil prices. Yet several arguments cast doubt on the validity of this claim. First, although the stock of open futures contracts is many times larger than the flow of oil consumption in the United States, comparing these two statistics is misleading. Stocks are not measured with respect to a specific unit of time but flows are, so the two are not directly comparable. Second, empirical analysis shows that changes in financial firms' positions do not predict oil-price changes, but that oil-price changes predict changes in positions. Third, the evidence indicates that financial firms' positions did not cause the market to expect persistent price increases during 2007/08. Other explanations for the increase in oil prices include macroeconomic fundamentals, such as interest rates and increased demand from emerging Asia. Of these two explanations, the one that seems most consistent with the facts explains oil-price fluctuations in terms of large and persistent demand shocks related to growth in global real activity in the presence of supply constraints.
Subjects: 
International topics
JEL: 
Q41
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
260.27 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.