[lbo-talk] Latest al-Qa'ida attack puts Saudi oil industry in question

Michael Pollak mpollak at panix.com
Mon May 31 15:04:03 PDT 2004


On Mon, 31 May 2004, Dwayne Monroe wrote:


> It seems these "al-Qaida linked militants" have found a choice target,
> very close to home and only have to continue their violent work to make
> the world nervously sweat. If this is al-Qaida, as seems very likely
> (ObL's home turf after all), I must admit it's a bit of a masterstroke

Yep. And for those of us interesting in economics, it plays right to the markets' weakness in times of crisis, namely the ease with which it can be stampeded. Even if all investors are aware there is no supply effect, it is rational for them to presume that each of them will presume that everyone will bid up the price because of widespread fear. It is rational to presume irrationality and to act on it.

The vast majority of people have never digested the fact that the famous "second oil shock" in 1979 was purely a matter of panic buying. The Iranian revolution threatened to cut off supplies (specifically through an oilfield strike that preceded it). But it never did. Rather countries and companies lurched to lock in long term contracts at higher and higher prices -- much like California during the power crunch. So it took a few years to unravel.

Not that things are mediated through the futures market, the bubble could come undone much more suddenly. But conversely, the terrorists could learn to play it like a fiddle and keep it peaked indefinately.

There are probably many other possibilities for multiplier effects from terrorism directed at global markets. All of which would turn on "soft targets" that are virtually uncoverable. But like Dwayne says, oil has a kind of perfect magical significance for these guys. It means they can make it a war about oil just like they made it a war of civilizations.

Michael



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