Back in 2008, when the price of oil was zooming up to $140 per barrel, there was a lot of chatter about whether Wall Street deserved the blame. And that debate hasn’t vanished. Last month, Sen. Bernie Sanders (I-Vt.) cited a report from the Commodity Futures Trading Commission as proof that “Wall Street speculators dominated the oil futures market.” Economists like Paul Krugman, meanwhile, have argued that supply and demand were the chief culprits. Oil was getting pricier because China, India and Brazil kept using more and more of it, and production couldn’t keep up. So who was right?

(Associated Press)

In the past decade, the authors note, the oil market has changed in a striking way: Large financial institutions, hedge funds and other investors have started pouring into the futures market to take advantage of oil price changes. In 2004, there was just $13 billion invested in commodity index trading strategies. By 2008, that had ballooned to $260 billion (though it collapsed for awhile after the financial crisis struck).

That, in turn, proved significant. Speculators can affect the oil market by buying a large number of futures contracts and pushing up the price of oil for future delivery. Producers, in turn, respond by deciding to hold oil back from the market so that they can sell for a higher price later on. In theory, this should lead to a notable build-up in oil inventories — and some economists have often cited the lack of such inventories as evidence that speculation isn’t to blame — although this can get tricky. Data on global inventories can be shaky. Plus, producers can just as easily respond to higher futures prices by cutting back on production or by, say, ordering their tankers transporting oil for delivery to move more slowly.

The St. Louis Fed authors tried to disentangle these factors, looking at how different shocks affected demand for oil inventories and cutbacks in production. They found that, from 2004 to 2008, shifts in global demand were the most important drivers of the oil market, accounting for about 44 percent of price fluctuations. But financial speculation proved to be the second most important factor, accounting for about 15 percent of price shifts. (Speculation, the authors found, also drove a small portion, 17 percent or so, of the supply cuts from OPEC and elsewhere.) That’s not as crucial as, say, Bernie Sanders has often implied, but it’s still pretty significant.