Market Madness by Blake C. Clayton

Author:Blake C. Clayton
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2014-11-20T06:26:00+00:00

Rumors and stories—some true, others not—about the price points of oil products for various transactions flew among traders, executives, producers, consultants, brokers, and the media.

Some of the demand for oil was precautionary, bought by refiners and others who wanted to store it as a sort of self-insurance policy against higher prices or outright shortage later on. No one knew how bad the crisis would get, and no one wanted to be caught on the wrong side of the shortage. The crisis was “driven by the fear of dearth” by those consumers who would suffer if future production did not meet their needs.32 There was a self-fulfilling element to the market’s worries over a rapidly worsening shortage. Amid the uncertainty over whether tomorrow’s supplies would be enough to get them by, buyers sought to get their hands on more oil than they would normally need, storing it against the threat of a worsening shortage.33 As buyers entered the market en masse, prices jumped. Rising prices and unusually large demand only increased the perception in the market that something was going terribly wrong.

Other demand for oil was more speculative. The fact was, OPEC stood to gain from taking prices higher by cutting back on volumes, given that most of their buyers would not be dissuaded even at previously unthinkable prices. OPEC knew that it was earning more money by selling less oil. Taking that into account, some market participants began to fear that OPEC might keep production down permanently—it appeared to have an incentive to, at least until people found ways to use less oil. Those who bought oil had reason to worry that the embargo was merely the first chapter in an era of permanent shortage and, hence, higher prices. U.S. Secretary of State Henry Kissinger, in December of 1973, described the “crisis” as much more than “simply a product of the Arab–Israeli war.” Rather, as he understood it, the shortage was the “the inevitable consequence of the explosive growth of worldwide demand outrunning the incentives for supply.”34 Seen through this lens, not all “panic buying” was as irrational as the word “panic” would suggest. Rather, from the standpoint of a speculator, it was a directional bet in favor of the possibility of higher prices later on, at which time the contracts or even the physical oil could be resold.35 Were OPEC to raise the price again, speculative oil bought at the close of 1973 might have been sold at a sensational profit. Fear of a new era of greater scarcity was moving the market in a gravity-defying way.

The denouement of the embargo turned out to be more mundane than its dramatic beginnings. The plot went out with a whimper. On December 4, the Saudis announced that they would no longer go forward with the month’s scheduled 5 percent production reduction. They gave no reason for their refusal to continue their participation in the embargo, but some speculated it came as retribution for Iran and Iraq’s failure to cut back their production.

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