06 August 2011

A Thought Re: The Crude Oil Boom and Bust of 2008

The price of crude oil rose steadily all through the first half of 2008, hit a peak in July of that year, and headed down for the remainder of the year, right through the election.  Given the rest of the dramatic financial and political events of 2008, and given the general contemporary expectation that the price of oil is tied into everything, this quick spike in crude's price has naturally attracted a lot of attention and speculation. 

Here's a bit more.

In August 2007, voters in Turkey elected Abdullah Gül their new President.  Gül was the first devout Moslem ever to become president of modern Turkey – a country that since it came into existence in reaction to its Ottoman precursors has possessed a determinedly secular political culture.  Indeed, the law at this time prohibited women at universities from wearing of headscarves, for fear of its Islamic implications.  Gül, too, was surely a matter of concern to the world’s oil traders, both those with speculation and those with hedging on their minds. 

Those nasty oil speculators were as usual, following events, not making them.  Early in 2008, Turkey’s parliament passed a law allowing for such headscarves, and it should be noted that the first lady of Turkey, Hayrünnisa Gül, wears a headscarf.

I have impressions and opinions about everything, and of course would be perfectly happy to see women at any university anywhere free to wear whatever head gear pleases them individually.  But such feelings are utterly unhelpful in analysis.  The significance of the issue of the secular or non-secular character of Turkey for the stability of the whole region should not be underestimated.

So a reasonable account of what happened to the oil market in the U.S., and what role it played in the business cycle, might be this.  The market (in accord with what the efficient markets hypothesis we’ve discussed in earlier chapters might lead us to suspect) understood that the U.S. is heavily reliant upon imported oil.  The price of any commodity in an efficient marketplace is forward looking, and events in the Middle East led the market to anticipate further trouble and to build that trouble into its prices.  Those were supply side calculations, i.e. calculations about where the oil was coming from.

Any sign of Islamism in Turkey naturally drew the attention of these market, and this attention may have started that dramatic upward move.

But when the market price started heading down, in July 2008, was this also a supply side phenomenon?  Was the market saying either that sources of supply overseas had been successfully secured or that domestic sources were going to take up the slack?  I doubt either versions of that hypothesis.  No, the most reasonable hypothesis is that in July 2008 the oil market collectively saw that the United States, and with it the rest of the industrialized, oil-consuming world, was headed into a deep recession that would undermine the demand for crude oil and any of its derivatives.     

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