As demand evaporated almost overnight, the financial system that had fueled the rally reversed course, leading to a collapse in prices. Speculation and Financialization of Oil The Role of Institutional Investors Arguably the most significant factor amplifying the price movement was the entry of large-scale financial players into the energy futures markets.
The Role of Institutional Investors and Market Speculation in 2008
The sharp global recession that began in the third quarter of 2008 dramatically reduced industrial activity and transportation demand. While developed nations consumed oil, the primary growth engine came from the industrialization of emerging markets, particularly China and India.
Traders worried about supply disruptions in the Persian Gulf, and this fear allowed for a "risk premium" to be added to the price of every barrel, regardless of actual shortages. The memory of the 1970s oil shocks was still fresh, and headlines regarding conflict in the Middle East—specifically the tension between Israel and Hezbollah in 2006 and the ongoing strife in Iraq—created a persistent cloud of uncertainty.
The Role of Speculation in the 2008 Oil Price Surge
Rising Demand from the Emerging Markets On the demand side, the world economy was experiencing a period of robust, broad-based growth. This meant that the world required exponentially more investment just to stand still, a challenge that put a floor under prices as investors demanded higher returns to finance increasingly difficult extraction projects.
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