Market Experts Point To Game Theory For Resistant Oil Stocks Amid Crisis
https://www.bloomberg.com/opinion/articles/2019-09-17/markets-are-pricing-in-little-risk-of-war-with-iran-k0nb8jgp
Recently, Iranian drone strikes have leveled Saudi Arabian oil fields with huge explosions severely damaging their infrastructure and destroying millions of dollars worth of the natural resource. Saudi Arabian leaders have since announced Iran will be held responsible for these attacks and that they will be withholding oil supplies to the rest of the world. This presents a huge issue for the United States in particular who have an enormous dependence on the foreign resources. The long lasting effects of this oil crisis are yet to be realized but surprisingly enough oil stocks have not taken huge hits as most people would normally associate with shortages like this.
There are a variety of theories including large reserves, decreasing dependence, previous market positioning, anticipated Federal aid, and history-based complacency however one of the most interesting theories is game theory. The hypothesis is that the Nash Equilibrium in this case points to both sides avoiding a war in Iran. For the US and its allies, a war would be exceptionally costly on political, human, and economic costs. For Saudi Arabia, the costs of war would be similarly great and they would have the upper hand in any peaceful negotiations. Therefore traders believe this shortage will not last and an agreement will need to be reached quickly as it is in the interest of both sides. If there is no escalation of the conflict the oil prices will rebound quickly and no one wants to be left out by selling right now which is keeping the prices from dropping too much. However, international relations are bound to be far more complicated than this simple game theory estimation and only time can tell if there will be further economic effects of this incident.