London attack drives oil lower?!?!? How?!?!?
Terrorists bomb London! It is rightfully the lead story of the day, and covered at length across the spectrum. Lashawn does a good job rounding everyone up, and I recommend a stop over there.
What I want to address is the “mystery” surrounding the drop in oil prices. I have heard repeatedly that this is the oil market’s irrational response to the London attacks—but is it irrational at all?
Why would oil go sharply lower in the wake of an Arab attack? Looking at the matter from a simple economic standpoint, the price of oil is determined by the supply relative to the demand for it. Thus if supply were to be threatened, and demand for oil stayed constant, there would be a rise in price; the relative value of the oil itself. It would, at first blush, seem logical that the future price of oil would shoot upward, given that terrorism implies instability in the oil rich Middle Eastern region.
But, and this is a "but" of “J-lo proportions,” oil futures went lower. This my friends, is not irrational market moves. Very rarely does the market more irrationally, due mainly to the fact that those who have enough resources to case any effect on the market are so vested in it that only rational speculation controls it. In fact, our markets move irrationally mostly when the common investor, you and I, enter it with exuberance. And were there to be a flood of buyers of oil futures, the price would shoot upward, again supply and demand.
The answer dear friends, in my humble opinion, is that oil shoot lower today, and will continue to do so, quite simply because one of three things will result from this madness; either (1) allied forces will redouble their focus on the oil producing countries- more troops- more money- more involvement; (2) oil rich countries in Africa and South America will be aided to increase their export, thus increasing the overall supply and driving down prices; or (3) a combination of both.
In any of these three situations, Arab markets will be somewhat marginalized. This, dear friends is what we should have been doing all along. You want to bite the hand that feeds you, ok, then you’ll get the stick. I love geo-politics.
These are my thoughts and opinions. You are welcome to add yours in the comment section.
What I want to address is the “mystery” surrounding the drop in oil prices. I have heard repeatedly that this is the oil market’s irrational response to the London attacks—but is it irrational at all?
Why would oil go sharply lower in the wake of an Arab attack? Looking at the matter from a simple economic standpoint, the price of oil is determined by the supply relative to the demand for it. Thus if supply were to be threatened, and demand for oil stayed constant, there would be a rise in price; the relative value of the oil itself. It would, at first blush, seem logical that the future price of oil would shoot upward, given that terrorism implies instability in the oil rich Middle Eastern region.
But, and this is a "but" of “J-lo proportions,” oil futures went lower. This my friends, is not irrational market moves. Very rarely does the market more irrationally, due mainly to the fact that those who have enough resources to case any effect on the market are so vested in it that only rational speculation controls it. In fact, our markets move irrationally mostly when the common investor, you and I, enter it with exuberance. And were there to be a flood of buyers of oil futures, the price would shoot upward, again supply and demand.
The answer dear friends, in my humble opinion, is that oil shoot lower today, and will continue to do so, quite simply because one of three things will result from this madness; either (1) allied forces will redouble their focus on the oil producing countries- more troops- more money- more involvement; (2) oil rich countries in Africa and South America will be aided to increase their export, thus increasing the overall supply and driving down prices; or (3) a combination of both.
In any of these three situations, Arab markets will be somewhat marginalized. This, dear friends is what we should have been doing all along. You want to bite the hand that feeds you, ok, then you’ll get the stick. I love geo-politics.
These are my thoughts and opinions. You are welcome to add yours in the comment section.
posted by Sonnyredd at 10:58 AM
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