Uncharted Territory

July 21, 2008

Pricking the Oil Bubble?: Bush, Fannie and the Ayatollahs

Filed under: Economics, Markets, Politics — Tim Joslin @ 8:41 pm

It sure is tough trying to explain events in our complicated, modern world. Now that divine intervention is out of fashion, we only have reason to guide us. And there is so much that simply seems irrational!

The Guardian’s Comment is Free (CiF) community is in a lather on the topic of conspiracy theories. I understood that any self-respecting conspiracy theory should be characterised by a complete lack of any evidence whatsoever. I’m therefore a little bemused by some of the discussion. Surely, if we consider speculation about the machinations at the heart of power structures to be conspiracy theories, as Dan Hind appears to, then we should consider ourselves all to be paranoid.

I’m currently reading “The Black Swan”, and I have to say that, if, like the book’s author Nassim Nicholas Taleb, you shun newspapers, then events are indeed likely to appear even more random than to the rest of us! I prefer to believe that all events do have explanations, even if we’re not clever enough to work them all out in advance. Or rather, since most events are predicted in some way by someone somewhere (for example, I recollect watching at least one movie in the 90s with attacks similar to those that later occurred on 9/11), the majority of us aren’t able to work out who is in fact right. The problem is how to distinguish the signal from the noise. The world is not random – even Taleb admits that “Black Swan” events can be explained after the fact. “Conspiracy theorists” are therefore, I suggest, obligated to provide verifiable facts in support of their case.

Last week saw astonishing movements in the markets, as the FT notes. Can we concoct any sort of rational explanation or do we have to put the whole thing down to randomness?

If we cast our minds back to the weekend before last, there was an air of crisis in the markets, centred around Fannie Mae and Freddie Mac, whose share prices were falling by around 20% a day. The authorities in the US took the unusual step of making an announcement on the Sunday (13th July), of what has been called a “rescue” of the two companies. I suggest it was nothing of the sort. Rather it was a statement of willingness to conduct a rescue. Sure, a little flesh was put on the bones, but in essence all that happened was a bit of expectation management. The markets were merely told what they knew already, that is, that the US government implicitly backs Fannie and Freddie.

If I recollect correctly, Fannie and Freddie’s share prices started rising by double-digit daily amounts immediately after the “rescue”. But the broader markets were not soothed. On Wednesday, though, relentless buying of oil gave way to a spectacular drop in the price. Panic-selling of stocks suddenly turned into panic-buying. Soon the bear-hunting season was in full swing. Further measures to counter destructive short-selling were a factor in the turnaround, but these won’t have affected the key factor, the price of oil. The problem with oil is those evil long-buyers!

No, the panic only really subsided on news of apparent reductions in tension in the Middle East. First, the US decided to start talking to Iran. And second, as discussed in one of the most depressing opinion pieces I’ve ever read, Israel exchanged prisoners for bodies with Hizbullah.

Now, it seems to me that decision time at the heart of power is a commodity in very short supply. Decisions on bailing out Fannie and on foreign policy have something in common. Both, I suggest, have to be taken at the heart of the executive, maybe even by George W. Bush, MBA, himself. So, given the intensity of the financial crisis a week ago, the most effective way to open doors in the White House would have been to provide ways of calming the traders.

The markets seemed to be terrified by the never-ending rise in the price of oil. What better way to progress your own agenda than by providing a solution to this aspect of the problem? I therefore wonder whether what we’ve seen is really “a long-overdue shift in American policy”. Instead it may have been more of a tactical move to give the appearance of defusing tensions in the Middle East, with the primary goal of reducing pressure on the price of oil and relieving the crisis in the financial markets (and, I should note, perhaps a secondary objective of taking the wind out of the Obama’s sails as he prepared a week of foreign visits, speeches and policy announcements). The diplomatic moves may have little bearing on the US’s long-term intentions, or the reasoning may have even been, cynically, that, if the US does decide to take more forceful action against Iran (or give Israel the nod), they can say they tried everything. Likely the reasons are complex, and it’s quite possible that different factions within the US administration interpret the move quite differently. I’d guess that the panic on Wall Street at least affected the timing of the diplomatic initiative.

I can’t let a CiF piece from a Charles Harb pass without comment. Many who added comments to the piece itself considered the author to be arguing in favour of terrorist tactics. It’s hard to argue with such an interpretation when Harb writes that: “Hizbullah fulfilled yet another pledge, and successfully ended another chapter in its longstanding battle with Israel”, and that “Hizbullah’s success can be added to its already long list of achievements” [my stress in both quotes] but sneers at “‘Arab moderates'” [he used quotes] and talks of the “now barren ‘peace process’ [which] keeps edging ‘forward’ through road maps, countless summits, visits, and vague ‘visions’ of a Palestinian state that fails to materialise…”. Harb’s piece is so extreme that it wouldn’t surprise me if the Guardian received complaints about it. Perhaps that explains why it was closed to comments between about 7:19pm on Friday 18th July and 10:27am on Saturday 19th.

Reading a piece like Harb’s certainly leads me to the conclusion that, as far as Israel and the Palestinians are concerned, the two sides are not even on the same page. In fact, the two sides do not even agree on who the two sides are. Hizbullah, believe it or not, is not a party in the conflict between Israel and the Palestinians. They crossed a border that was not in dispute to provoke the 2006 war in Lebanon. It seems parts of the Moslem world do not yet accept the right of Israel to exist whereas the rest of us frame the issue as one about the borders of a Palestinian state. And, as was pointed out in comments on Harb’s piece, you can’t follow two policies at once – negotiation cannot succeed when it is being undermined by violence. Harb only reinforced my agreement with the analysis I heard in a public meeting a while back when my MP predicted no substantive change in the Israeli-Palestinian situation by the end of the next US President’s term in office.

Rather than gloat about a Hizbullah “victory” we should perhaps ask ourselves about the motives of the other participants. I can only explain why other Lebanese politicians associated themselves with celebrations of the release of Samir Kuntar by assuming their judgement is clouded by a yearning for the inter-religious harmony that persisted in Lebanon for centuries, which is described by Taleb in Black Swan (see what you can find out by hoovering up information!). OK, I write from afar, but it seems to me that the harmonious Lebanon of the past is gone forever.

Even more interesting may be the motives of the Israelis. I understand the prisoner exchange was mediated by Merkel (and, I assume, OK’d by the Americans, perhaps for reasons similar to those behind their Iranian diplomatic initiative), but the Israelis didn’t have to do it and they didn’t have to do it now. Here’s my “conspiracy theory”. Let’s first remember that Israel “lost” the 2006 war in Lebanon partly because of Western public opinion, not Moslem public opinion. Bush and Blair were forced to demand a halt to the bombing of Lebanon and the Israeli incursion across the border. Now, Israel will have learnt from that experience. They will also have had a fair idea of what would happen when Kuntar was released. The prisoner exchange may have been “good” PR for Hizbullah in the Arab world, but I’m afraid it was also “good” PR for Israel in the West. Especially “good” PR if they are contemplating military action.

What bearing does all this have on the markets? Well, I’m not convinced that Fannie is any safer than before, nor that Israeli action against Iran’s nuclear installations is any less likely than it was 10 days ago. Nothing substantial has happened. No bad news has been got out of the way. My experience may be a little limited, but I recollect the markets plummeting practically until the day of the Iraq invasion in 2003. With markets, it’s all about anticipation. Until the issue of Iran’s nuclear ambitions is resolved unambiguously I suspect the oil price will not retreat decisively and, irrespective of whether the worst effects of the credit crunch have yet been seen (I suspect not, but that’s another story), we won’t reach the bottom in the equity markets.

I’m not raiding my piggy-bank to buy shares just yet!



  1. […] theory in his analysis of Channel 4) but the very last column it all falls to pieces (see yesterday’s post for my views on conspiracy theories and the need to read the detail to avoid Taleb’s […]

    Pingback by Global Warming and the Nature of Science, or, The Ofcom has Spoken! « Uncharted Territory — July 22, 2008 @ 4:38 pm

  2. […] the price of oil to overshoot on the way down… On the other hand, oil might shoot up again.  I wrote a few days ago that the issue of Iran has not gone away.  As I recollect, the talks last weekend […]

    Pingback by Zero Carbon » Reflections on Reflections on Oil — August 10, 2008 @ 2:43 pm

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