Full Title: Don’t Blame the Physical Markets: Financialization is the Root Cause of Oil and Commodity Price Volatility
Author(s): United Nations Conference on Trade and Development
Publisher(s): United Nations Conference on Trade and Development
Publication Date: 9/2012

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The sharp price movements of many primary commodities, including oil, have fueled  intense debate about the causes of the price hikes and possible remedies. Growing  demand from large developing economies and frequent supply shocks, such as adverse weather and export bans, are generally accepted as more tangible factors that explain  volatility, rather than the hundreds of billions of dollars of bets placed on expectations  of temporarily rising prices. Despite a growing body of evidence on the destabilizing  influences emanating from financial markets, the “real economy” explanations still  dominate the debate. It is not commonly recognized that demand from financial investors  in the commodity markets has become overwhelming during the last decade. Of course,  supply and demand shocks can still move commodity prices time and again. But with the  volumes of exchange-traded derivatives on commodity markets now being 20 to 30 times  larger than physical production, the influence of financial markets has systematically  transformed these real markets into financial markets. This calls for strong and prompt policy and regulatory responses in the financial markets, rather than in the physical  markets.