Goldman Sachs Group, Inc. (GS): How You Affect Oil Prices More Than Military Conflicts Do

“No one knows just what a war would bring, of course, or what the effect would be on oil supplies. Some analysts, looking at the bidding in the oil markets so far, say the price could [increase by 65%].”

That was a quote from The New York Times … on Sept. 28, 1990. The Iraqi invasion of Kuwait and the subsequent threat of NATO intervention had sent oil prices soaring 166% higher than prices only three months prior. Pundits and analysts in the article were pontificating about the possibility of $100 oil, which would have quite possibly created a global economic collapse, considering prices in July 1990 were in the $16 range.

Yet despite fearmongers’ lofty predictions of and Iraq’s deliberately causing the largest oil spill of all time, oil prices never went much higher than Sept. 28th’s price of $39.56. In fact, even before a single U.S. soldier had crossed into Kuwait on February 1991, the price of oil was already back down to $19.50.

In hindsight, the fears of a major disruption in oil supply were vastly overestimated, and the greatest enemy of investors, traders, and even everyday consumers ended up being themselves. The United States’ Strategic Petroleum Reserve at the time had enough oil to supply the nation with 3.5 million barrels per day for several months, which could have easily quelled any sudden drops in oil imports. Also, a quick historical look would have shown that both Iran and Iraq had been at war for eight years prior, but combined production from these two countries actually increased by 40% over the duration of the conflict.

Even though the public was presented presented with evidence of ample reserves and proof that oil production seemingly was able to survive in the face of the largest threats, it didn’t prevent people from succumbing to their primary emotional responses to stock up on commodities like oil in face of a potential military conflict that could disrupt oil supplies. More than anything else, people reacted more to the uncertainty of future events rather than the historical evidence that showed a more tempered approach would be more profitable in the long run. In the words of Goldman Sachs Group, Inc. (NYSE:GS)‘ top economist at the time, Thomas McHale:

“[P]sychologically, people are going to worry about having inventory; they’ll pay anything for it. [Then] it will sink in, the fact that there is sufficient physical oil.”