If actors in markets are rational, unexpected news which dramatically and suddenly decreases the expected future supply of a resource would increase the price today. But, if such information were already known to actors in the market and incorporated into market decisions, we would expect a gradual increase in prices and no sudden price spike. That's why I still have faith that markets will adjust smoothly to decreasing oil reserves.
ONE of the week's interesting stories is a Guardian piece describing a Wikileaked diplomatic cable concerning Saudi oil reserves:
The U.S. fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.
The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels-- nearly 40%.
The story has gotten a lot of attention, but prices haven't risen, which suggests that experts already knew this (and indeed, people have been speculating about such an overstatement for at least four years). It's actually kind of interesting to note that early takes on a potential reserve overstatement date to 2007, which is when oil prices began rising at a faster pace. Saudia Arabia has about a fifth of known oil reserves, so a revision in its holdings of this magnitude is significant.
