Publications: Notes at the Margin

Petro Ostriches and Financial Contagion (March 20, 2023)

 

The ostrich is a commonly known bird that has seemingly been around since the dinosaurs. While the primary Merriam-Webster definition for “ostrich” is “swift-footed flightless bird,” an alternative meaning reads, “One who attempts to avoid danger or difficulty by refusing to face it.” The dictionary explains that this interpretation results “from the belief that the ostrich when pursued hides its head in the sand and believes itself to be unseen.”

 

We consider most individuals in and around the oil industry to be “Petro Ostriches.” Again and again, government officials, company executives, market analysts, and reporters have adamantly refused to address sudden and important changes in the economy that could have devastating impacts on oil. Instead, their heads plunge immediately into the dunes.

 

We first noted this reaction during the 1979 Iranian crisis. At the time, this author was an adviser to the US Secretary of Treasury. The sudden oil price increases after the revolution and the Shah’s ouster created a need for prompt action. The author, a longtime student of financial market contagion, urged energy policymakers to do something, as did the Secretary. They ignored our calls. From under the sands, the words “we know better” could be heard.

 

This ostrichlike behavior has continued for fifty years. During the recent CERAWeek, speech after speech focused on the rosy outlook for oil. Somehow the words were clear, even if uttered by speakers whose heads were below ground.

 

In short, the behavior of Petro Ostriches has not changed. We begin by summarizing the likely market impact, explaining how the Ostriches will probably contribute to sharp price declines.

 

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