Oil is a commodity, but it’s also something more, and therein lies the complication. And risk and opportunity.
The dual status of oil as raw material and proxy for global macroeconomic risk dates to at least the 1973-74 oil crisis, when OPEC waged an economic war against the West with crude as its primary weapon in support of the Arab attack on Israel. Although oil was used previously as a strategic weapon, the events of 1973-74 elevated the commodity’s profile on the global stage on that front to unprecedented heights. Since then, oil’s price has reflected the forces of both supply and demand, and global risk perceptions.
Supply and demand are almost always the dominant pricing factor. Global risk’s influence on price, by comparison, waxes and wanes. In the late-1990s, the risk premium in oil was relatively low; today, it’s quite high.
No one can say for sure how much risk impacts price for oil on any given day. But it’s clear that crude is not just another commodity. Yes, gold too is influenced by global risk, but gold has no strategic economic use. Jewelry and industrial demand are pricing factors for the precious metal, but those applications are hardly critical in the global economy. In any case, most of the gold mined in history sits in vaults and safe-deposit boxes and so no one worries about a shortage. The only question is price, which is largely driven by sentiment and the vague memories that the metal was once used as legal tender. We don’t discount gold’s value as indicator of danger in the world economy, but in terms of practical applications it’s virtually irrelevant next to oil.