Oil Prices and the Iraq War: Market Interpretations of Military Developments; Strategic Insights: v.2, issue 4 (April 2003)

Abstract

By their nature, crises tend to have a negative impact on markets and economic activity. In a play on the old market adage, Buy on the rumor, sell on the fact, market wags now advise one to Sell on the saber-rattling, buy on the bullets. Another variant suggests a wise move is to Buy when you hear the sound of the cannon; sell when you hear the sound of the church bells (quoted in Walsh, 2002). While no doubt good advice in many cases, are these words of wisdom good guidance when it comes to oil markets during periods of war and conflict? Drawing on a framework developed at the Naval Postgraduate School for the Chief of Naval Operations (Looney and Schrady, 2000; Looney, Schrady, and Brown, 2001, and Looney, 2003), and applied to several recent conflict situations, this Strategic Insight examines oil price movements prior to and immediately following the initiation of the current conflict in Iraq. Are the oil price movements seen to date similar in nature to those previously observed in wartime situations? Are the markets reacting in a rational, predictable way to readily available information on military developments? This document also summarizes the light shed on these issues by prior research and outlines a model for assessing the current conflict.