oil vs other commodities

Historically commodities have demonstrated a remarkable tendecy to move along with crude oil prices. What is the explanation for this baffling correlation?

1) Finding causal links between the factors that influence a certain commodity's price and the factors that determine oil price can be a mind-bending exercise. Often these factors are not clear. Even if they are clear, there are hundreds of direct and indirect ways in which they can interact.

For example, the main inputs for steel are electricity, coking coal and iron ore. The latter two represent a massive fraction of the sea-borne dry-bulk trade. Hence their prices are inevitably affected by changes in fuel prices which are in turn affected by changes in crude oil prices. More over, the majority of electricity in steel-producing countries is generated by thermal power plants. Therefore steel prices are also sensitive to changes in thermal coal prices. However it is rather hard to find any concrete links between (locally-mined) thermal coal prices and crude oil prices. (Note that there is very little substitution between the two commodities.)

2) The correlation may be a spurious one that emerges from regressing one non-stationary time series onto another. (See this paper for technical details.)

3) There may be a tenuous link through the expectations (e.g.signalling) channel. Crude oil prices keep track of the global economic growth prospects. Their recovery sends a bullish signal to every other market where the aggregate supply can not adjust as quickly as the aggregate demand.

4) The correlation may be due to a third causal factor that simultaneously influences prices of both oil products and other commodities. Instead of looking for causal arrows that point from oil to another commodity (or vice versa), we should perhaps be searching for a third factor that spits out arrows towards these two commodities. (For example, as people get wealthier, they buy more cars and thereby consume more gasoline. Gasoline is distilled from crude oil and cars are made of steel. Hence a speculative housing bubble that lifts the overall wealth can lead to greater demand for both iron ore and crude oil.)

5) Perhaps the correlation is simply a monetary phenomenon. Markets may be pricing everything in energy units and not in US Dollars. The correlation ensures that the relative price relationships between the commodities remain in tact.