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Why the Osama bin Laden Drop in Oil Prices Couldn't Last

"Will an unintended consequence of Osama Bin Laden's death be lower gas prices?" asked Fast Company this morning. The answer to that is a resounding "no." Don't go out and buy a gas guzzler -- oil fell because of an emotional reaction from traders, and the fact that the price soon rebounded was entirely predictable. And sensible, too.

The news of bin Laden's death caused jubilation in western capitals -- and a sharp drop in the price of oil. Peter Beutel, an oil analyst at Cameron Hanover, said in his Daily Hedger that "traders speculated that oil supplies from central Asia and the Middle East might now be more secure after the demise of the Al Qaeda leader."

First reactions give way to reality
Bin Laden was the world's most wanted man for nearly a decade -- so his death released lots of pent-up enthusiasm. The traders' first thought was that security would improve, but that was soon followed by concerns that it wouldn't. And so after dropping the furthest they had in three weeks in early Monday trading, oil prices then soared to their highest levels since the fall of 2008.

Beutel told me that the Bin Laden factor might have knocked as much as five cents off the price of a gallon of gas, but it didn't last:

At one point it was a factor, a pebble in the traders' shoes. But there's a whole quarry of other pebbles in those shoes. There are so many things you can point to in this oil market.
The fundamentals that have caused oil prices to zoom higher haven't changed, and the killing of bin Laden won't affect those. The West is still heavily dependent on a commodity whose remaining supplies are concentrated in a part of the world either overtly hostile to it or in flux. Regime change in Libya would probably have a longer-term effect than the death of bin Laden, since Gaddafi controls a spigot of high-quality oil that supplies Europe and the U.S.

Nevertheless, the first reaction to the news sent West Texas crude down more than $1.50 a barrel, and Brent crude from the North Sea down more than $2. After that dramatic fall, buyers realized they couldn't go wrong buying suddenly affordable oil.

No Middle Eastern resolution
Oil prices have been moving steadily up in recent months, and a major reason is continuing turmoil in Middle East oil-producing regions such as Iraq, Iran and Libya. The WSJ reported that bin Laden's demise "might trim some of the 'terror' premium built into oil prices..." But bin Laden spent the last decade decentralizing his terror network and empowering regional commanders, some of whom will be spurred to action by the loss of a leader who, although underground for 10 years, was a potent symbol. Significant retaliation? It's a factor not to be dismissed.

Even the reporting on the price drop shows that emotions drove the first market reactions. CNN reported that investors "breathed a sigh of relief" as they send oil down two percent in early trading. But James Williams, an energy economist at WTRG Economics, told the news service:

It's very difficult to see how this event will fundamentally change supply or demand for crude oil. This seems like a gut reaction to what the West views as a happy event. A lot of times we see markets move on happy news that in reality has nothing to do with the market, and I think this is one of them.
Williams got it right. A shot heard 'round the world caused a burst of unsustainable optimism that sent oil down, and stocks up. But there's no end in sight to the war on terror, and stability in the Middle East is only a distant dream.

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