small rises in the current spot level.
On the other hand, as the right-hand side of Figure 2 shows, an expected 5% loosening of net supply leads to a large fall in financial participation. This suggests that the fall in participation in 2008 may have been the result of an anticipation of slack in spot oil. Conversely when there is an expected tightening of future supply, inventories will be accumulated and this will stimulate greater need for the hedging services of purely financial players. We should expect a rise in financialisation during these episodes. The implication is that financial participation and oil prices could both be due to anticipations of supply and demand changes, and are not necessarily driven by the incentives of financial players.
Moreover, comparing the vertical and horizontal striped bars, financialisation is predicted to have lowered expected future prices even if it raised current prices. This latter finding is, we argue, a quite general feature of financial layer changes. Incentives to financial players do not affect spot supply and demand directly; financial layer changes only alter how much inventory will be carried over from current to future spot markets. Thus if any change in the financial layer leads to more inventory accumulation, it will indeed raise current spot prices, but then also lower expected prices. If it leads to fewer inventories, then current prices will fall as expected prices rise. Either way, the consequence of financialisation shifts for final consumers who buy spot oil now and in the future will be limited as the current and expected future spot prices will only move in opposite directions and of a very similar magnitude. Because it can have only a seesaw effect on the term structure of prices, it would take an implausibly huge change in financialisation in order to lead to the large change in the level of spot prices we have observed.
In conclusion, these findings (and others in the paper) act as a warning to inferring that greater financialisation has caused higher oil prices on the basis of relationships such as in Figure 1. Theory predicts powerful natural limits