Stock prices tanked on Friday as oil prices
rallied to $104 a barrel. We also saw a sharp rally towards the end of
Friday that cut intra-day losses in half. In my opinion, that rally was
short covering ahead of the weekend, where any settlement to the Libyan
situation would likely lead to a severe drop for oil prices, and
possibly, a rebound for stocks.
Sadly, the fighting in Libya goes on. It would
seem that Qaddafi has no future as Libya’s president. And further, it
would seem that only massive civilian casualties will stop what’s now
being called a rebellion. Qaddafi appears willing to try.
I suppose the danger for Libya now is that Qaddafi
could garner some support from foreign governments in exchange for oil
money. But at the same time, a similar deal could be in the offing with
the anti-Qaddafi rebels.
What once looked like a conflict that might have a
quick resolution now threatens to drag out. And that’s not good for oil
prices or stocks.
And what may be worse, the rhetoric from Saudi
Arabia suggests that the government is afraid that more protests are
As of Sunday night, crude futures were already
close to $106. The pressure of rising oil prices has reportedly prompted
president Obama to consider opening the strategic petroleum reserves,
where the U.S. has around 727 million barrels of oil.
I am skeptical if that would really help oil
prices much when the fear is that instability comes to Saudi Arabia.
Saudi Arabia’s King Abdullah has already sought to pacify the people with
a $36 billion public spending bribe. I won’t be surprised to the house of
Saud offer more concession to avert potential unrest.
*****I hope you’ll forgive my insistence on
viewing these scenes of human struggle in terms of stock market valuation
and oil prices. But I take my job as an investor seriously.
Let’s not forget that it is basic economics that’s
underpinning the rebellion in the Middle East. Food inflation may have
been the tip of the iceberg in Tunisia and Egypt. But people want a
better life for themselves and their families. Basically, they want more
money, or at least the freedom to make more money. Unfortunately for
Mubarak and now Qaddafi, their governments did not create open and free
markets. But of course, how could they?
Dictatorships are unsustainable because the
interest of the ruler(s) eventually collides with the economic interests
of the marketplace, flow of goods, people and money.
*****So it’s no surprise that other Middle Eastern
countries are trying to get ahead of the source of conflict. Jordan has
made token changes to appease protests, as has Bahrain. We’ve discussed
Saudi Arabia already. Yet protests continue.
Don’t overlook the Chinese reaction to the
developments in the Middle East. The one thing that terrifies China’s
Communist party is social unrest. And what’s more, China’s leaders are
well aware that inflation will spark unrest.
China‘s has been
moving to combat inflation for months. In a speech three days ago,
China’s premier Wen said that reining in consumer and property prices was