It has long been an observation of mine, set down at some length in my Inquiry into the Nature and Causes of the Wealth of Nations, that the price of any commodity is determined not by the intrinsic labour embedded in it alone, but by the whole constellation of circumstance attending its production, its conveyance, and the confidence of those who traffic in it. The events of this past Friday furnish as neat an illustration of that principle as a philosopher could wish.
West Texas Intermediate and Brent crude, the two great benchmarks by which the trading world measures the cost of combustible mineral oil, fell together to the neighbourhood of eighty-eight dollars the barrel. The occasion was not a sudden discovery of new fields, nor any improvement in the art of extraction, nor yet a diminution in the wants of the manufacturing nations that consume this substance in prodigious quantity. The occasion was a report — a report, let us be precise, not yet a treaty, not yet a ratified instrument of any kind — that the governments of the United States of America and the Islamic Republic of Iran might, before the close of the present weekend, arrive at some arrangement sufficient to lift commercial sanctions upon Iranian oil and to restore the free passage of vessels through the Strait of Hormuz.
The Strait of Hormuz is a narrow neck of water connecting the Persian Gulf to the Gulf of Oman, and through it passes, by most reckonings, something approaching one barrel in every five consumed upon the surface of the earth. That a body of water scarce forty miles across at its narrowest should exercise such dominion over global exchange would have astonished the merchants of an earlier age, though I confess it does not astonish me. In the Wealth of Nations I observed that the division of labour is limited by the extent of the market; it follows, with equal force, that the extent of the market is limited by the security of the channels through which goods must travel. Close those channels, and the market contracts; open them again, and it expands. The price of petroleum, on Friday, contracted forty miles of conjecture into several dollars of movement.
What merits the philosopher's particular attention is the velocity of the transmission. No oil changed hands through Hormuz on Friday by virtue of any new agreement, for no agreement existed. No Iranian barrel found a new customer. No tanker altered its course. The mechanism that conveyed the diplomatic rumour into the price was purely the faculty of expectation — what I have elsewhere called, in a somewhat different connexion, the imagination of the impartial spectator, extended here not to moral sympathy but to mercantile anticipation. Traders, acting upon intelligence that the sovereign powers might soon consent to a resumption of ordinary commerce, adjusted their offers accordingly, and the price fell.
This is, in one sense, the market performing precisely the function that its admirers claim for it: aggregating dispersed information, discounting future contingencies, and arriving at a number that reflects not merely present supply and demand but the probability of future ones. In another sense, it is a reminder that the whole elaborate machinery of international trade — the refineries, the tankers, the pipelines, the futures contracts written upon them — rests, at its foundation, upon the political decisions of sovereign governments, and can be moved several dollars in an afternoon by the possibility that two of them may choose, for the moment, to speak civilly to one another.
The barrel, at eighty-eight dollars, awaits the weekend with what patience a commodity can muster.