A skeptic is one who challenges everything he or she hears or reads. While free markets work best when both parties in a transaction have access to the same information, skeptics doubt this to be the case. When money is involved, market participants can put out distorted or even fraudulent information to further their own ends.
Skeptics know this and consequently insist on verification of whatever information they read or hear. Accurate information is vital to any investing strategy. In the early days of information technology, there was an acronym in wide use – GIGO – that stood for Garbage In, Garbage Out.
A case in point is the information swirling around regarding the future direction of the price of oil. More than any other commodity, the price of oil drives global markets.
• Higher oil means consumers will spend more to fuel their vehicles and spend less on other goods.
• Higher oil means businesses will spend more to transport goods, driving up prices and reducing profit margins.
• Continuing margin pressure on businesses will lead to rising unemployment.
Oil broke through $100 a barrel recently – a level not seen since the dark days of 2008. What next? At the end of February 2011, a single analyst predicted the price would rise to $200 a barrel. A few days later, another analyst jumped in with the same general opinion, this time with a price of $220.
That kind of prediction makes investors of all types sit up and take notice. Some rush to the exits to sell out now before it is too late. Many who do are basing their decisions on the belief the information they have in hand is accurate. Libyan unrest has led to a disruption in supply and further unrest could lead to $200 a barrel oil. Done.
Skeptics do not accept that argument unchallenged. They remember the predictions in 2008 that oil would reach $200. It never happened then and for it to happen now would take a perfect storm of events. Thus, skeptical investors everywhere sit at their computers in search of evidence of that impending storm.
First, they scratch around for information about Libyan oil production and learn they are the world’s 15th or 17th largest supplier, producing 1.6 million barrels of oil a day. That does not seem to justify the price rise until they learn Europe gets around 85 per cent of its oil from Libya. If Europe hits a big bump in the road, much of the world will follow, or so the argument goes.
Keep in mind; all many casual investors have heard up to this point is there is trouble in Libya. Information that comes out in snippets and sound bites leads some to believe Libyan production has halted, when it has not.
The skeptic keeps digging and finds Libyan production is down anywhere from 50 per cent to 66 per cent. They further learn the oil producing regions in Libya are in the eastern part of the country, now controlled by anti-government forces who have pledged to continue and increase production. The proponents of $200 oil do not believe it. Nor do they believe the pronouncements of the Saudi Arabian government that they will increase production to make up the shortfall of the kind of oil – light, sweet, crude – produced in Libya.
What they do believe and fear is that the unrest in the Middle East will spread to Saudi Arabia, a country that through its OPEC influence controls around 35 per cent of the world’s oil. That would be the final piece in the perfect storm scenario.
Casual investors say to themselves – “If it happened in Tunisia, Egypt, and Libya, it can happen in Saudi Arabia. I am going to keep selling my shares.” In the coming months, fortunes will be made and lost over the question of the direction of the price of oil.
Unfortunately, much of the information investors need to decide for themselves a course of action to take is very difficult to find. Despite the fact that Saudi Arabia has abundant wealth, unemployment amongst the 15-24 year old age group is around 40 per cent. Everyone who spends even a brief time following the news knows that the young have fueled the unrest throughout the Middle East. Why not in Saudi Arabia? Every country has disgruntled youth. Are the youth of Saudi Arabia unhappy enough to rise up in organized protest? That is vital information you need to know as an investor.
Something happened last week that provides a clue, but the Western press barely noticed. King Abdullah, the reigning monarch of the Kingdom of Saudi Arabia, returned home after spending 3 months in the West undergoing medical treatment.
Search the web for yourself and you will find news stories flavored by headlines like “Abdullah returns to a troubled Middle East.” His return was coupled with the announcement of about 36 billion dollars in social spending for the benefit of the citizens of Saudi Arabia. News accounts implied this was done to head off trouble. The CNN website had a video showing the King’s motorcade driving through the streets of Riyadh, without focusing on the surrounding crowds.
Here is what the western press missed – the streets were lined with people – most of them young – cheering on their King. The Arab press reported it but only a CNBC reporter on assignment in Riyadh had something to say to the west. He got caught in traffic and observed for himself the cheering young people. Here is a link to his commentary article on the American CNBC website: http://www.cnbc.com/id/41743620
In case you have difficulty with the link, here is a quote from the conclusion of the article: “The fact most of these people are young is very telling. There may be an unemployment rate of 39 percent for people between the ages of 15-24, but there appears to be no shortage of love for the king. If these scenes are being repeated across the country, and I was trading oil right now, I would be wondering when to short. The scenes I have witnessed here are totally incompatible with oil traders’ fears of a Saudi spillover. The idea of regime change seems just about the last thing the youth of Riyadh want.” The point is not that the sight of cheering youth guarantees stability in Saudi Arabia. The point is it went largely unreported in the press. Information is power and in these days of instant communication, misinformation can “go viral” in a matter of minutes. On 1, March 2011 a rumor spread through the heart of the American financial capital – New York’s Wall Street – that Saudi Arabian tanks had crossed the border into Bahrain. The price of oil went up and stock markets everywhere went down. The Saudi Arabian market lost 5 per cent. Initial reports from a Russian news agency claimed to have come from “eyewitness accounts.” However, the report was later denied by the government in Bahrain, long after the rumor had its desired effect on market prices. What’s more, this rumor will take on a life of its own on Internet websites all over the world.
Was this story deliberately misleading? We may never know, but it certainly helps make the case that healthy skepticism can be a good thing. The current oil crisis is not likely to resolve itself anytime soon, so next week we will look at some of the driving forces behind information and its distortions.