Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)

It is commonly asserted that speculative buying by index funds in commodity futures andover–the–counter derivatives markets created a ‘‘bubble’’ in commodity prices, with the resultthat prices, and crude oil prices, in particular, far exceeded fundamental values at the peak.The purpose of this paper is to show that the bubble argument simply does not withstand closescrutiny. Four main points are explored. First, the arguments of bubble proponents areconceptually flawed and reflect fundamental and basic misunderstandings of how commodityfutures markets actually work. Second, a number of facts about the situation in commoditymarkets are inconsistent with the existence of a substantial bubble in commodity prices.Third, available statistical evidence does not indicate that positions for any group in commodityfutures markets, including long–only index funds, consistently lead futures pricechanges. Fourth, there is a historical pattern of attacks upon speculation during periods ofextreme market volatility.