Oil prices are struggling to stabilize in the wake of what some are calling a "black swan" event.
It refers to a theory popularized by Nassim Nicholas Taleb, a well-known risk analyst and statistician.
A black swan is an outlier, a development that fails to follow any normal pattern.
According to Taleb, a black swan event has three characteristics:
- It is a surprise. Nothing in the past can convincingly point to its possibility.
- It has a major impact.
- People contend that they expected the event to take place (in hindsight).
To put this theory into perspective, Taleb considered World War I, the breakup of the Soviet Union, and 9/11 as examples of black swan events, so these are hardly everyday occurrences.
Almost 15 years ago, Taleb applied this approach to the stock market and has been a regular on financial TV ever since, especially when things seem to be taking a turn for the worse.
As a consequence, this has led to the black swan being used as an "explanation" for all kinds of things. It's the obverse of the mantra "this time is different."
And that leads us back to the true nature of the 40% drop in the price of oil…
Oil Prices: A Fall That's Hardly "Out of the Blue"
Over the past couple of days, I have seen three separate prognosticators claim that the stunning fall of crude is a black swan event.
It isn't. But calling it one may be a good way of clouding up what really is happening.
First off, there were always indications on both the supply and demand side that matters were softening. Second, the OPEC non-decision on Thanksgiving to keep production levels unchanged was both predictable (from the Saudi perspective) and telegraphed in advance. Then, the orchestration of the talking heads commentary on the tube made the whole move "legitimate."
This is hardly something that emerged out of the blue. It's also not the stuff of a true black swan.
Unless, of course, there is another motive at work and the black swan becomes a convenient cover. Instead, this is what is really happening when it comes to crude oil prices.
Yes, there are traditional pressures driving down the price of crude oil. Rapidly increasing supplies and slower demand would have created a correction in oil prices in any event.
But dropping over $40 a barrel has required something else entirely.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.