Monopoly Power, Futures Market Manipulation, and the Oil Price Bubble
2008
Just, David R. | Just, Richard E.
The US Congress has become concerned with the possibility that much of the recent rise in oil prices is due to speculation or market manipulation. We propose a theory of futures market manipulation that can potentially explain such manipulation and an associated price bubble. Our model involves a price-setting off-shore exporter (e.g., OPEC) of a commodity (e.g., oil) with price-taking domestic production and consumption sectors. If domestic next-period price expectations are linked to futures prices, then OPEC may drive up current prices through manipulative buying in the futures market, achieving an increase in market power for their cash-market exports. An increase in future price expectations increases storage, artificially driving up current market prices. We explore the conditions necessary to make this an optimal strategy for OPEC.
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