How You Affect Oil Prices More Than Military Conflicts Do
"No one knows just what a war would bring, of course, or what the effect would be on oil supplies. Some analysts, looking at the bidding in the oil markets so far, say the price could [increase by 65%]."
That was a quote from The New York Times ... on Sept. 28, 1990. The Iraqi invasion of Kuwait and the subsequent threat of NATO intervention had sent oil prices soaring 166% higher than prices only three months prior. Pundits and analysts in the article were pontificating about the possibility of $100 oil, which would have quite possibly created a global economic collapse, considering prices in July 1990 were in the $16 range.
Yet despite fearmongers' lofty predictions of and Iraq's deliberately causing the largest oil spill of all time, oil prices never went much higher than Sept. 28th's price of $39.56. In fact, even before a single U.S. soldier had crossed into Kuwait on February 1991, the price of oil was already back down to $19.50.
In hindsight, the fears of a major disruption in oil supply were vastly overestimated, and the greatest enemy of investors, traders, and even everyday consumers ended up being themselves. The United States' Strategic Petroleum Reserve at the time had enough oil to supply the nation with 3.5 million barrels per day for several months, which could have easily quelled any sudden drops in oil imports. Also, a quick historical look would have shown that both Iran and Iraq had been at war for eight years prior, but combined production from these two countries actually increased by 40% over the duration of the conflict.
Even though the public was presented presented with evidence of ample reserves and proof that oil production seemingly was able to survive in the face of the largest threats, it didn't prevent people from succumbing to their primary emotional responses to stock up on commodities like oil in face of a potential military conflict that could disrupt oil supplies. More than anything else, people reacted more to the uncertainty of future events rather than the historical evidence that showed a more tempered approach would be more profitable in the long run. In the words of Goldman Sachs' top economist at the time, Thomas McHale:
"[P]sychologically, people are going to worry about having inventory; they'll pay anything for it. [Then] it will sink in, the fact that there is sufficient physical oil."
Today, we find ourselves in a similar position to the days before the 1991 Gulf War. The alleged use of chemical weapons in Syria has led to international backlash and the possibility of U.S. intervention in the Syrian civil war. The threat of a U.S. strike has raised many questions: What kind of military response should we expect from the United States? Will Iran and Russia, both allies of the Syrian government, respond? What if Israel gets involved? Could this potentially affect the Suez Canal and its Sumed pipeline, one of the most critical oil transit routes in the world?
These uncertainties have driven the price of Brent crude up by 4% over the past couple of days, even though no intervention has commenced. It appears that the evidence of increased U.S. production, big oil discoveries in ultra-deepwater regions around the world, and a U.S. Strategic Petroleum Reserve currently at almost 700 million barrels is still not enough to keep investors from stocking up in fear of a looming crisis.
What a Fool believes
The lesson to be gained from these situation is, as always, that investors are faced with uncertainty everywhere you look. In the past 100 years of U.S. history, the U.S. has been actively engaged in a military conflict for 43 of them. We have experienced oil embargoes, missile crises, multiple economic collapses, peak oil, and everyday stories that should give us reason to sell non-essential items and stock up on commodities just in case.
The key to being a great investor isn't about timing the market perfectly or trading the hot stocks and dropping the losers; it's having the temperament to put aside our immediate emotional responses to these situations and evaluate then dispassionately. It's not an easy task. We're fighting against the very mechanisms that have helped us as a species survive to this day. Those who have been able to do it over a long period, though, have benefited immensely.
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The article How You Affect Oil Prices More Than Military Conflicts Do originally appeared on Fool.com.Fool contributor Tyler Crowe covers anything energy for The Motley Fool. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter: @TylerCroweFool.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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