A popular view is that the surge in the price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation...

We assess the causes and implications of the greater financial participation in commodity markets post-2003. Focusing on crude oil, we build a calibrated macro-finance model of oil prices and quantities that also determines consumer welfare. We show that shifts in the preferences and constraints...