New favourite economic term: Jedi Mind Tricks

These aren’t the droids you are looking for.

Saudi Arabia’s “jedi mind tricks” as described by FT Alphaville (and more recently here)  involve telling the market where they want the oil price to be. The aim is that if the market knows where Saudi Arabia wants the price to be, they might conclude that Saudi Arabia will change the oil supply to achieve that price. It would be foolhardy to bet against that clear message.

Of course, it does beg the question, why doesn’t Saudi just change the supply to achieve the price that want?

  • If the price is too low, they might want to increase the price without reducing supply, to increase their revenues even more.
  • If the price is too high (as it is now) they actually might prefer to increase supply without the price declining from a pure revenue perspective. This might require some Jedi Mind Tricks since natural supply and demand would move it to other way.  It seems they actually want something different now – they want a lower price to moderate economic stresses in the global economy (and presumably limit the incentive for research into oil alternatives and US offshore drilling etc.). It should be easy then to increase supply, make more profit and slowly watch the oil price decline. Win-win.

So why are they announcing this to the market? Clearly something is not working in the supply-demand theory for oil, suggesting sentiment plays a far bigger role in the day to day, month to month oil price than fundamentals do.

Or Saudi is running out of oil.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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