by Soft_Landing » Mon 23 Aug 2004, 14:45:46
One need's to be careful here. There are actually two terror premiums in play, and most writers confuse the two. On the one hand, there is the possibility of terrorist acts targeting civilians or symbolic targets, a.k.a., sept 11. In this case, oil prices would fall. The amount that oil would fall in this case is quite low. The terror premium that results from this type of possibility is negative, that is, exerts a negative effect on oil price.
On the other hand, there is the possibility of terrorist attacks against oil production or refining infrastructure. In the event of these kinds of attacks, the oil price would likely go sky high. This is the kind of terror premium that can add significant amounts to prices. The second kind of terror premium is much larger than the first primarily because the amount prices would move in each case. Increasingly, traders are becoming wary that terrorists might seek to target oil infrastructure, given that the strategic weakness has been exposed. Thus, the increase in price pressure from the terror threat far outweighs the decreasing price pressure.