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Attacks on speculators during the financial crisis

Looking back to the financial crisis of 2008/ 2009 provides a helpful case study. During this time, “speculators” were blamed for price rises in oil, usually with no evidence to support the claims. Numerous market experts found that economic fundamentals provide a better explanation for the movements in commodity prices.

These include:

In 2008, speculation did not cause oil to hit its peak of $145-a-barrel. The CFTC's chief economist, Jeffrey Harris, told a Senate hearing in May 2008: "Simply stated, there is no evidence that position changes by speculators precede price changes for crude oil futures contracts". He said the increase in oil prices in 2007 occurred "with no significant change in net speculative positions."

Writing in August 2009, David Nicklaus for the St. Louis Post-Dispatch (McClatchy-Tribune) argued, “Oil wasn't the only commodity to go on a wild ride last year. Metals and agricultural prices were rising at the same time, although by varying amounts. Much of the so-called speculative money flowing into markets was actually in commodity index funds, a tool that conservative investors viewed as a hedge against inflation.”

"The first myth is that high prices are caused by technical factors, such as speculation. While these factors may have an impact on the margins, the data clearly show that high prices are really caused by economic fundamentals."
- Let the markets end the energy crisis

- Tony Hayward (CEO BP), Financial Times (06/11/08). Click here to view the full text of this article

Paulson conceded that record oil prices and $4-a-gallon gasoline were "a problem" for the U.S. economy but blamed it on supply and demand and declined to blame speculators for playing a role in soaring prices. "My position, and I've looked at this very carefully, is I don't believe financial investors are responsible to any significant degree for this price movement," Paulson said on CNN.
- Double, or quit? – Editorial, Financial Times (06/09/08). Click here to view the full text of this article.

“The Task Force has found that the activity of market participants often described as “speculators” has not resulted in systematic changes in price over the last five and a half years. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.”
- Interagency Task Force, Interim Report on Crude Oil

“If speculation by long-only index funds did impact commodity futures prices, it is not evident in the empirical evidence available to date. Economic fundamentals, as usual, provide a better explanation for the movements in commodity prices.”
- Dr. Scott H. Irwin, University of Illinois (02.01.09)

“If financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year.”
- Ben Bernanke (Federal Reserve Chairman), Congressional Testimony (7/15/08). Click here to view the full text of this article

The International Energy Agency (IEA) issued its Medium-Term Oil Market Report on June 31, 2009. The report’s discussion on price formation notes that, “In short, the ‘speculation’ argument has been just as pronounced during the down-cycle and recent uptick as it was when oil prices were breaking record highs. The IEA has continued to monitor market developments both fundamental and non-fundamental factors and reiterate our opinion that price rises or falls tend to be multifaceted, rather than driven by a single cause.”1 The full EIA report is available via subscription only, but an overview presentation can be found here.

"There's nothing to it to start with... That's not what happened. You have 85 million barrels a day of oil available in the global energy market and 86.4 million barrels a day of demand. So the price of oil is going to go up until you can kill demand."

- Pickens Says CFTC Probe of Oil a 'Waste of Time' – Boone Pickens (Billionaire Hedge-Fund Manager), Bloomberg (06/02/08). Click here to view the full text of this article

“Even if we see significant short-run gains in global oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007-08 will be back to haunt us again.”
- Dr. James D. Hamilton, Professor, University of California San Diego, Testimony before the U.S. Congress Joint Economic Committee (05.20.09)

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