Speculators at the Pumps

Until a few weeks ago, while oil prices were surging, debate raged about the relative roles of economic fundamentals and speculation in boosting oil prices. Although oil prices have now fallen back from their peak, that debate must not be forgotten, for the evidence points to speculation, with profound policy implications that we cannot afford to ignore.

WASHINTGTON, DC – Until a few weeks ago, while oil prices were surging, debate raged about the relative roles of economic fundamentals and speculation in boosting oil prices. Although oil prices have now fallen back from their peak, that debate must not be forgotten, for it has profound policy implications that government officials would be derelict to ignore.

Of course, if higher prices are due to fundamentals, oil markets are working as they should. But if they are due to speculation, then policymakers speculators must act to rein in behavior that has imposed huge and needless costs on the global economy. And, when the evidence is confronted, it points to speculation as a culprit.

Whereas many oil market participants have blamed speculation, most economists defend how oil markets have performed and point to economic fundamentals. One argument that economists use is that higher prices are due to the weak dollar. Because oil is priced in dollars, a weak dollar makes oil cheaper to users in other countries, which increases global demand.

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