Is Oil Speculation Responsible for High Gas Prices?

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Our explanation does not stop with correlation, however.  We go a couple steps further in to turn correlation into a proper causal explanation.  First, the patterns of price increases we have observed above are coincident with changes in commodity market policy and trading behavior, as the following exhibit shows.  We identify specific policy changes that led to changes in behavior that triggered increase in both prices and volatility.  This close temporal coincidence strengthens the causal claim. 

A broad range of analysts and physical traders now point to the explosion of trading as the cause.  There is no doubt that there has been a huge influx of money into these markets and a dramatic increase in the number of open positions.  The volume of trading has increased four-fold in the past six years, while the value of trading has increased over twelve times and the price has risen as well.

Second, we identify the conceptual mechanisms through which speculation translates into higher commodity prices. As prices and volatility rise in a market, it gets harder and harder to convince people who have the physical commodity in the ground to part with it.  They have to be bribed with higher prices to lift the oil not only because they can expect a higher price in the future, but also because they demand a higher risk premium to insure against the chance that they are selling at the bottom of volatile price swings.