Policy makers are still grappling with the economic crisis, because they failed to properly identify the core problems and challenges affecting the economy. As an answer to the crisis, they’ve developed a myriad of solutions looking for the root cause of the economic crisis. As a result, we often hear policy makers contend that doing nothing is not an option; they’ve to do something.

However, if they’re not sure of what they’re doing, doing nothing may be the better option. Nonetheless, macroeconomics theory appropriately used could identify the root cause of the economic crisis and postulate robust solutions.

Historically, in the United States spikes in crude oil prices precede recessions Additionally, most crude oil price spikes can be attributed to exogenous events such as military conflicts. Thus, a large body of research suggests that spikes in crude oil prices have considerable adverse effects on the economy.

When there is violence or rumors of violence in oil producing regions speculators bid up futures prices of crude oil. Speculators believe that regional instability would curtail the flow of crude oil and hence futures prices would be higher than present prices. So, they purchase crude oil in the present to be delivered at some predetermined future date and price.

Speculators expect that the price in the future will be higher than the price paid in the present for the future option.

However, if many speculators are purchasing crude oil in the future, they artificially bid up the price of crude oil, even in the absence of shortages.

As the price of crude rises, consumers pay more for energy and energy related commodities from their fixed income. Thus, there is a wealth transfer from consumers to speculators, energy conglomerates and energy producing nations.

As a result, consumers have less disposable income to purchase other necessities or commodities.

Ironically, the vast majority of futures crude oil trading is done by the oil industry itself. Studies by the New York Mercantile Exchange (NYMEX) suggest that the oil industry accounts for about 85 percent of trading.

The ability of oil industry traders to bid up crude oil prices through NYMEX is not beneficial to average Americans. In fact, it jeopardizes the nation’s economic wellbeing. And, that is why the government needs more effective regulation on crude oil trading.

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