When talking about the movement of oil prices, I often refer people to the movie “Trading Places,” and specifically to the scene where the elderly investment bankers are explaining the futures market to street hustler Eddie Murphy, and he says, “I get it. You guys are bookies.” One of the brothers turns to the other and says, “I told you he’d get it.” To many, Wall Street, stock and commodity markets, appear like gambling which serves no purpose, which is a complete misunderstanding of their function. (Topic for another day.)
Granted, the sudden swings in the market seems to many to resemble gambling more than investment, and the scene in “Trading Places” where brokers shift their trading on a dime based on a piece of news or rumor does not help correct that impression, but the point is that, in the long run, all of those pieces of news add up to market information that informs the traders and helps to determine the appropriate prices.
That said, far too many take individual pieces of data or events as evidence of long-term trends and fail to differentiate between transient events or exceptions to the rule and long-term or fundamental trends. Examples include the Shah of Iran, who sold an individual cargo of oil during the first Oil Crisis for $17 a barrel (about $80 adjusted for inflation), far above the posted price, and didn’t realize that was an aberration reflecting specific needs of a buyer, but thought it represented the true ‘value’ of oil. Needless to say, the Shah was not a microeconomist.
Many others made a similar mistake during the Iranian Oil Crisis, which was a complex situation but dominated by the loss of nearly 6 million barrels of day of supply because of the Iranian Revolution and the subsequent political disruption in the world’s foremost oil producing region. But ultimately, as expert reports weighed in, the conclusion was that the problem lay in the scarcity of oil resources, with the U.S. Secretary of Energy predicting that global oil production would never surpass the then level of 65 mb/d. (It has hit 100 since.)