Speculation and Oil Prices

On 17 April 2012, Obama Administration proposed new initiatives to strengthen oversight of energy markets.   

The President's plan call on Congress to:

•  Increase funding to increase the number of surveillance and enforcement staff charged with oversight of the oil futures market;
• Allow the Commodity Futures Trading Commission (CFTC) to upgrade the technology used to monitor the energy markets;
• Increase the civil and criminal penalties for those convicted of manipulating the oil futures market;
• Provide the CFTC with additional the authority to raise margin requirements in oil futures markets to limit disruptions in the oil market; and
• Expand access to CFTC data so that analysts can better understand trading trends in the oil markets.

Here are some initial reactions from economists on the impact of speculation as well as on the possible impact of Obama’s proposal on oil prices:

John Cochrane: http://johnhcochrane.blogspot.com/2012/04/speculation-and-gas-prices.html
Jim Hamilton:    http://www.econbrowser.com/archives/2012/04/a_ban_on_oil_sp.html
Scott Irwin:        http://www.farmdocdaily.illinois.edu/2012/04/speculation_and_gasoline_price.html
Lutz Kilian:         http://www.cnn.com/2012/04/19/opinion/kilian-oil-speculation/index.html
                            and
                            http://www.voxeu.org/index.php?q=node/7892

Do Exchange Rates Matter?*

Oil prices have experienced large fluctuations in recent years.  The spike in crude oil prices in mid-2008 to more than $140/bbl, followed by a steep correction in late 2008/early 2009 and subsequent sharp rebound over the last two years have jolted the world economy and pinched consumers at the fuel pump. US dollar weakness in recent years is frequently cited as one reason for high oil prices. It is very common to see the financial press suggesting that a weak dollar has pushed oil prices higher. However, this explanation is challenged by the empirical observations that (a) a change in oil price tends to lead to a change in the exchange rate as predicted by economic theory and (b) the oil price has risen regardless of what currency unit one uses to measure the price of oil.