Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

To be honest, I don’t know of any real data that the staff can bring to bear on this question. We have some data on the trading contracts and who is trading, and to some degree these data may shed light on a measure of how much of the trading is fundamental and how much of the trading is, for want of a better word, speculative. But that’s just nonfundamental traders, non-end users. I don’t know that such knowledge would tell you how much of the price change is due to which sort of activity. My remarks this morning attempted to highlight the fact that the endogenous part of this behavior is the price structure and the inventory behavior that emerge. I think that there was an interaction in those things, although as yet we don’t have real formalized models of inventory behavior that I want to claim any systematic truth about. But I think that the volume of trading and the volatility it might induce in prices does feed back to demand for actual physical product through the behavior of inventories. So although it’s also true that the speculative traders are adding to the upside and the downside, they are eliciting a response from the oil producers on the one hand and, to some degree, from the oil consumers on the other to change their inventory behavior. That also feeds back on how the price dynamics work. Right now, I think basically they are providing liquidity to this market, but they may well be amplifying the swings—but I can’t put a number on it; I really can’t.

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