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July 26, 2006


On the face of it it makes sense. Still, I am curious about the risk premium and how it comes about. Specifically, I would assume that the price of oil does not magically increase when there are disturbances; rather, some people buy additional oil to safeguard against future supply disruptions, thus raising the current price. The question then is whether there is a concomitant depression in the price of oil when conditions are calmer and these reserves are released. If so, the benefit to the producers would obviously be less (though still positive).
But I may have too shallow an understanding of the oil markets; in particular I don't know what the role of the oil futures market is in setting current prices.

Recall that 9/11 dramatically reduced oil prices.
Decreased demand for flights was more important than vague fear of instability.

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