Oil price dynamics, macro-finance interactions and the role of financial speculation

What is the role of financial speculation in determining the real oil price? We find that while macroeconomic shocks have been the major upward driver of the real oil price since the mid 1980s, financial shocks have also sizably contributed since early 2000s, and at a much larger extent since mid 2000s. Despite financial shocks contributed with 44% out of the 65% real oil price increase over the period 2004-2010, the third oil price shock was a macro-financial episode: macroeconomic shocks actually largely accounted for the 2007-2008 oil price swing. While we then find support to the demand side view of real oil price determination, we also find a much larger role for financial shocks than previously noted in the literature.