What's behind the rise in oil?
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What’s behind the rise in oil? Don’t expect the financial media to tell you
Early this week, the price of a barrel of oil rose above $85. Two reasons were given for the price rise. On the one hand, there was geo-politics; the Turks were puffing out their chests and warming up their tanks. On the other was the weather; winter was coming. You could take your pick. As to the former, we have more to say. As to the latter, what more could you say? Were we really supposed to think that oil traders had just noticed the change of the seasons? Had someone just explained to them the tilt of the planet and the effect of earth’s annual orbit around the sun?
Prices rise and fall. But readers are not content with the facts; they want to know why. They look for something that usually doesn’t exist – an explanation they can project into the future like a flashlight, so they can see where they are going. Financial journalists scratch their heads and use their imagination. But woe to anyone who takes this stuff seriously.
In fact, the ‘why’ of it is as impossible to decipher as an undertaker’s moods. Is he made unhappy by the sight of another corpse? Or, does the arrival of another uncomplaining customer lift his spirits? Most likely you will never get to the bottom of it. Nor will you ever really know what moves market prices. Sun spots? Sentiment? Supply and demand? Probably all of these things – and millions more. The price of oil, measured in dollars, reached an all-time high this week. But if there is anyone who can really tell you why, he is not working for MoneyWeek magazine.
While the second explanation was ridiculous, the first was sublime. Its immediate, if not proximate, cause was an event that happened 109 years ago – the massacre of the Armenians by the Turks. A short history of that event goes as follows. The Turks are Islamic. The Armenians are Christians. The Turks didn’t trust the Armenians and didn’t want them around. So, they rounded them up, deported them, and killed them. Of course, the story is more complicated than that. When you get into it, history becomes as slippery as the financial news. Whether it was a conscious effort at state-sponsored extermination, we don’t know. But there were as many as 1.5 million Armenian corpses by the end of it, so many that even now, four generations later, they can still stink up the oil market.
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Since we are writing from Buenos Aires, we have perhaps acquired a keener taste for the absurd anyway. We pick up the story from La Nacion: “In a climate of maximum tension in the region, Turkey bombarded Kurdish cities in northern Iraq, while preparing its forces for an imminent incursion…”, said the paper. Then quoting a Turkish military commander, La Nacion continues, apparently delighted to find a general as foolish as its own: “The United States has shot itself in the foot”, said General Buyukanit. It pulled the trigger, according to press reports, by signing off on a UN declaration labelling the Ottoman Turk massacre of the Armenians a “genocide”. George W. Bush himself had weighed in against the resolution; not on the grounds that they hadn’t massacred the Armenians, but on the grounds that the Turks might get cheesed off if we mentioned it.
But the US Congress decided to take the high road – since there seemed to be no money or power at stake; it condemned the Turks as mass murderers. Now comes word from Washington that Congress may be reconsidering; politicians are watching Turkish tanks roll into Kurdistan and beginning to think that the low road might have been a better choice; at least they are much more familiar with it. But we are not writing to make fun of our countrymen. Instead, we are making fun of the financial media. If oil hit $86 because the Turks were on the warpath, why hadn’t it hit $86 during World War 1? Or World War II? Or the Vietnam War? Or during the Iran-Iraq war? It is because the numbers are as greasy as history itself.
Looking back, we see the price of oil going from a low of $1.99 in the year we were born – 1948 – to its high above $85 today. At first glance, it looks as though oil is 20 times more valuable. But wait. Look at the money in which it is quoted. Depending on how brutally you crunch the numbers, the dollar could be worth only about 1/20th of what it was back then. Or take the price in 1864. The Times says you could have bought a barrel of oil back then for $8.06. In today’s money, that would be more than $100 a barrel. Or look at the price at the time of the Iranian Revolution in 1974. Oil traded nominally for about $31 that year. But in real terms, The Times says, the price was higher than today – at $88. Then, during the Iran-Iraq war of 1980, again in real terms, the price of oil rose to more than $90 a barrel.
In the short run, the rising price of oil may be recording an increase in geopolitical risks in the Middle East. In the long run, it is telling another story: the fall of the dollar.
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