Well I've been pretty smug with my fellow economist bloggers on the oil speculation issue. But I think my sweeping pronouncements before were too strong (strident?), and that it's possible for speculators to drive up spot prices, without leading to inventory buildup and without forcing oil prices to be in contango. Rather than trying to give more general rules for what can and can't happen, let me just tell a little story, and you tell me if it sounds plausible (or even true!).
The Fed has been doing CRAZY stuff trying to resuscitate the credit and real estate markets. And yet many traditional measures of irresponsible monetary policy aren't giving off warnings. (E.g. M1 and M2, long-term bond yields, CPI, and PPI.) So, to put it simplistically, where has all this new money been going?
Let's say that the Fed really is injecting hundreds of billions, and that it hits the financial big players first. Where are they going to put it? Real estate? Stocks? Bonds? Heck no, those are all terrible investments right now in the U.S., and they're not so hot in the rest of the world either.
But commodities is pretty attractive. They will always be in demand, even during recessions; it's not like you're investing in sushi restaurants in Boise. What's really nice is that the nature of your "bet" (i.e. investment) liquidates itself fairly quickly. With a stock or bond you are (in theory) betting on a stream of events well into the future, whereas you can take a position on silver in four months and not be nearly as tied down.
OK, so suppose all these hundreds of billions are bypassing the larger economy (and hence not showing up in official aggregate statistics) and going right into commodities futures.
Perhaps (mis)led by the boost in futures prices, Saudi Arabia becomes convinced that there will be a huge surge in demand for oil in, say, the latter part of 2009. So they cut current output, in order to expand their capacity in 2009.
Because of Saudi Arabia's cut in current production, the spot price of oil shoots way up. In fact, it goes up so much that backwardation is restored in the oil yield curve. I.e., even though the sudden influx of speculators with hot Fed money has caused futures prices to double (let's say), once everyone adjusts, the new equilibrium will have a spot price that doubled too.
Now because Saudi Arabia was willing to substitute oil output so much (i.e. they had originally had so much excess capacity slated for 2009), the spot price was able to rise and mute any incipient incentive to hoard physical oil. So inventory data wouldn't show any signs of this massive Fed distortion of the oil market, and as we already showed, there could be backwardation in the oil yield curve.
Well gee whiz, I've gotten into this so much that I almost convinced myself. I should probably sleep a night on this one.
In any event, I looked at my inner economist and discovered that I very well may have been too flippant with Tyler Cowen. Even if it turns out not to fit the data, the above story is certainly theoretically possible.