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Oil: Where it Goes After the Israeli Bombings

"Nothing is more troubling to financial markets than uncertainty... And nothing creates more uncertainty than war, the most unpredictable of all human activities." - John Steele Gordon, The Great Game

On September 12, 2001, I issued a special report to my subscribers called, What Happens to Stock Markets When National Security is Threatened.

I studied every threat to national security in the 20th Century, and what happened to the stock market afterward. I did the research through the night on September 11th. I felt my subscribers needed to know what could happen... whether the news was good or bad. The conclusion of my report was optimistic:

"Ultimately, buying after the period of mass uncertainty, and around the time that some resolution of the uncertainty appears imminent, has traditionally been an excellent way to make money in stocks."

September 11th changed everything in America. The day before, we were blissfully ignorant. Now we're aware that there are thousands of men out there, willing to kill us without remorse, simply because we don't believe in their god.

At the end of my September 12th report, I also included a special section on what happens to commodity prices in times of war. What I found is particularly applicable right now, with what's going on in Israel today...

In my look at commodity prices, I started with oil. I said, "History suggests that oil prices only rise if the opponent poses a threat to the world supply of oil."

I gave a few examples of international crises where oil was not at stake in the conflict:

"During the Korean War, oil prices fell in inflation adjusted terms. During the year of the Cuban Missile Crisis, oil prices fell adjusted for inflation. And as we steadily became more involved in Vietnam, oil prices fell from 1965-1972 adjusted for inflation. In these situations, the oil supply was not at risk. So if the world supply of oil is not at risk, the price of oil is not at risk.

"However, if the world oil supply is perceived to be at risk, oil prices will rise. During the Iran/Iraq conflicts of 1978-1980, oil prices more than doubled from $14 a barrel in 1978 to $35 in 1980. Also, oil prices spiked significantly higher when Iraq invaded Kuwait in 1990. But prices then quickly subsided to two-decade lows in 1994."

The conclusion was simple: "Based on limited evidence, it seems clear that oil prices rise when the supply of oil is threatened in particular, not our national security."

I believe that conclusion today. But how do we size it up now? If Israel and Hezbollah keep the fighting amongst themselves, there shouldn't be a long term impact on the price of oil. To be brutally honest, this doesn't affect the world supply of oil.

The question is: How far will things escalate? I'm no expert in that. Honestly, the possibilities scare me. If oil keeps going up, chances are, it's telling us we've got a lot more to worry about than expensive gas at the pump. Just as the stock market is typically a good leading indicator of the economy... oil is likely a good leading indicator of tension in oil-producing nations.

Starting today, you can think of the price of oil like the president's approval rating... as the price falls, the world is "voting" that the tensions in the Middle East are easing. And if the price of oil rises, unfortunately, chances are, there's more trouble to come.

If you want the honest answer on how things are going day-to-day on the Israeli border, don't watch the news. Watch which way the price of oil moved that day. That will tell you all you need to know.

Good investing,


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