Oil Price Fear Premium Returns With A Vengeance

The “fear premium” has returned to oil prices over the last two weeks after a long absence. It’s all related to the Iran conflict, and unfortunately no end seems to be in sight.

Back in the early years of this century, when I was conducting government policy work in Austin, I had a conversation about oil prices with a member of the Texas House of Representatives. This was amid a spiking of crude oil prices during those up-and-down years in the aftermath of 9/11.

He asked me why the price had shot up by something like $15 following that awful event since the market at the time was probably over-supplied according to all available data.

“Simple,” I told him, “It’s the fear premium.” That is the phenomenon in oil markets in which crude prices rise due to fear among traders that a conflict in the Middle East region could impact oil flows through the Strait of Hormuz. The market fundamentals don’t really matter much during such times.

When he asked what portion of the price at the time was due to nothing but fear among traders, I told him it was probably in the $15-$20 range, which translated to an additional 30-40 cents per gallon at the pump. We then spent half an hour talking through the fundamental details of how crude prices are determined on the global market, impacting everyone on earth.

That conversation still sticks in my mind because this fellow was one of the handful of members in the Texas House at the time who had a strong understanding of oil and gas, yet that was apparently the first time he’d heard of the fear premium concept. And to be fair, that was and still is typical of most Americans, 98% of whom seldom have any reason in their lives to learn the details of what goes into the price of oil on the open market each day and how those factors translate to the price of gas when they fill up their cars.

Most Americans don’t really even notice the price of gas until it rises significantly and causes them pain in the pocketbook. Even then, the only thing most people know about it is that they’re angry because they have no choice but to buy it, and whichever person who happens to be President at the time is to blame because the media told them so.

And that’s where we sit today: The fear premium is back into the price of oil in a big way following years of relative absence, and the pain at the pump is back with it. Most of the media is screaming it’s all Trump’s fault even though it is thanks to Trump’s Energy Dominance policies that the U.S. is energy independent and insulated from any supply shocks to come.

Wash, rinse, repeat.

• Richard Nixon got blamed for the Arab Oil Embargo of 1973 even though his administration’s policies had little to do with creating the problem.
• Jimmy Carter got blamed for the OPEC Oil Shock of 1979, and, to be honest, he fully deserved it.
• Ronald Reagan got blamed for the recession that was caused by the policies of the Nixon/Ford/Carter stagflation era and received little credit when his own policy choices created an enormous economic boom.
• George W. Bush got blamed for the $5 gas at the pump prices in 2008, and like Carter, he largely deserved it, though Bill Clinton and George H.W. Bush should have received a share of the blame.
• Currently, President Donald Trump is being blamed for higher gasoline and diesel prices resulting from his decision to finally, at long last, decisively deal with the Iran problem Carter helped to create, and which his predecessors refused to deal with across 47 long years of Mullah-led death and terror.

Now, the fear premium is back and as big as ever, and 98% of Americans still really don’t understand anything about it.

Amazing. But that’s life in America. It isn’t perfect – it’s just better than any other place on the planet.

David Blackmon is an energy writer and consultant based in Texas. He spent 40 years in the oil and gas business, where he specialized in public policy and communications.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.

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