have argued that the introduction of derivative markets would stabilize commodity prices over time. But a few left-leaning economists have thought that some commodity derivatives might be manipulated to destabilize prices.
Unlike wheat or corn or most other commodities, oil can be stored indefinitely, and its prices are highly controlled by a handful of governments and cartels. Thus the effect of derivatives on oil prices might be different from the effect of derivatives on the prices of other commodities. A US Energy Department summary of numerical studies over more than a century suggests that, unlike derivatives in most other commodity markets, oil derivatives either have NO EFFECT on prices or are DESTABILIZING.
From page 4 of
http://www.eia.doe.gov/oiaf/servicerpt/derivative/pdf/chapter8.pdf :
"Effects of Derivatives on the Volatility of Market Prices
The general issue of the effects of speculation goes as far back as Adam Smith in 1776 and John Stuart Mill in 1871.(130) Both argued that speculators profit by buying when prices are low and selling when they are high. Successful speculation would be expected, therefore, to lower price volatility.... Kaldor (1939) argued that sophisticated speculators would exacerbate price changes by selling to less informed agents at prices above the competitive price. In a more formal model, Baumol (1957) argued that speculators amplified price changes by buying after prices have increased, causing additional price increases.(132)
Because derivatives are highly leveraged investments, they enhance both the incentive and means for speculation. Thus, if speculation is destabilizing, the introduction of derivatives will increase volatility. Additionally, derivatives can increase the speed at which new information about the fundamentals of a product is reflected in prices. Thus, in markets with derivatives, prices should respond more quickly to new information, which would increase volatility in the commodity market. In this case, however, the greater volatility would be associated with more accurate prices and improved allocation of resources.(133)
Academic researchers have intensively studied the actual relationship between derivatives and market vol-atility. Arecent literature review included more than 150 published studies in this area.(134)... Almost all the studies found that the use of derivatives either reduced or had no effect on market volatility.
Two of the studies examined the relationship between the use of derivatives and crude oil prices:
Author . . . . . . . . . . . . . . . . . . . . . . Commodity . . . . . . . . .Effect on Volatility
Antoniou and Foster (1992) . . . . . . .Crude oil . . . . . . . . .NO EFFECT
Fleming and Osydiek (1999) . . . . Brent crude oil . . . . . . HIGHER
Source: Energy Information Administration."