| | | You are receiving this as part of your subscription to Oil & Energy Investor. To remove your email from this list, unsubscribe here. | | | | | | | Friday, January 31, 2020 | The Latest Black Swan Does Not Float
By Dr. Kent Moors | Oil prices have been struggling to stabilize in the wake of the coronavirus (Wuhan virus) outbreak and the global panic developing because of it. True to form, some commentators have begun to describe this as a black swan event.
As such, I am drawn back to an Oil and Energy Investor article written more than five years ago. Then, the event was an OPEC decision to defend market share rather than price. That move ushered in an over 45 percent collapse in crude oil prices before the cartel (and outside "allies" led by Russia) began cutting production.
As I noted at the time, I have never been particularly attracted to this way of "describing" matters observers had not expected or could not predict. Basically, a black swan is an outlier, a development that fails to follow any normal pattern.
Black swan theory has been popularized in the work of Nassim Nicholas Taleb, a well-known risk analyst and statistician. Taleb wanted to develop an approach that could deal with: (1) the disproportionate role of high-profile, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance, and technology; (2) the non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities); and (3) the psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs.
To put matters in perspective, Taleb considered World War I, the breakup of the Soviet Union, 9/11, and the Internet as examples of black swan events, so these are hardly everyday occurrences.
Almost 20 years ago, Taleb applied his approach to the stock market and ended up as a regular on financial TV thereafter, whenever matters seem to be going well off course. As a consequence, this has led to the black swan being used as an "explanation" for all kinds of things. It is the obverse of the "this time is different" mantra.
Well, over the past week there have been several attempts to claim the Chinese virus as a black swan event.
It isn't. But calling it one may be a good way of clouding up what really is happening.
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| | | | | | |  | High Stakes: A Supremacy Standoff in the South China Sea
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