Stock Market Gyrates from Libyan Crisis

by John M. Curtis
(310) 204-8700

Copyright March 8, 2011
All Rights Reserved.                               

              Rising 35% since taking office, President Barack Obama dispelled on myth that Wall Street preferred an Republican in office.  When former President George W. Bush left office Jan. 20, 2009, the Dow Jones Industrial Average stood at around 8,000, dipping to 6,500 by March 2009.  Two years later it’s at around 12,250, nearly 50% higher than the March lows and some 35% higher from the inauguration.  Though Libya only accounts for about 2% of the world’s oil output or 1.6 million barrels a day, traders on the New York Mercantile Exchange with pressure from hedge and private equity funds trading oil stocks have sent oil prices spiraling out of control.  Publicly traded oil companies pounced on the opportunity to raise pump prices with unleaded regular now averaging $3.80 a gallon.  Today’s fragile economic recovery is now held hostage by the merciless oil industry.

            Because the Libyan situation creates a dark cloud over oil markets, Barack must act more decisively to help resolve the crisis.  With Kadafi hammering rebels with airpower in the Zawiya and Ras Lanouf, some 375 miles from Tripoli, rebel forces desperately need U.S. air support to press toward Tripoli.  Kadafi has redoubled his counter-offensive with his elite Khamis brigade, named after one of his sons.  Without U.S. air-support there’s a very real possibility that Kadafi can neutralize rebel forces, now occupying Benghazi in Eastern Libya.  Obama’s decision to help Libyan rebels would calm oil markets, currently spiraling upward on pure speculation on the NYMEX and other commodity exchanges.  When West Texas Intermediate crude oil hit $105 a barrel today, it became obvious that Barack could no longer sit on the sidelines and delay some type of response.

            Linkage between oil prices and U.S. economic growth has become obvious.  With oil prices spiraling out of control, the oil industry cemented its stranglehold on the U.S. economy.  No economy can thrive with runaway energy prices, robbing companies of the needed profits to move the economy forward.  Since Libyan uprisings started last month, the stock market has been taking profits, going through the kind of gyrations caused by geopolitical crises.  Intervening in Libya would help resolve an indefinite stalemate that could destabilize world oil prices and global economic growth.  Saudi’s decision to pump more oil doesn’t settle rattled nerves on trading floors worried about global economic stability.  Compensating for Libya’s lost oil production doesn’t resolve or stop hedge fund traders from bidding up the price of oil stocks.  Resolving the Libyan crisis should stabilize oil prices.

            Oil companies and their friends on the NYMEX need to stop the wild speculation in oil futures to help stabilize the economy.  As long as the oil industry sews more panic in the markets, global oil futures will continue to rise.  It’s going to take some kind of lecture from Obama’s bully pulpit to remind the oil industry to stop gouging consumers during a crisis.  No minor loss of oil production should cause oil prices to go through the roofl.  With much of U.S. refined products coming from Asia, there’s absolutely no excuse for the oil industry to continue hiking prices.  Conservatives blame rising pump prices on Obama’s radical environmental policy, letting prices escalate to promote conservation.  Some have short memories when the oil industry had the country over a barrel during the Bush years.

            Stability in world oil markets and continued U.S. economic growth is too important for president to ignore.  He can use the bully pulpit to remind Big Oil that the country won’t tolerate another rip-off at the expense of the economy.  Threats to the U.S. economy come from many places.  But if the oil industry forces consumers to tighten their belts, then the current economic recovery could stall.  Federal Reserve Chairman Ben S. Bernanke can only do so much to stimulate the economy by keeping interest rates low and buying back U.S. treasuries.  PIMCO’s Bill Gross, the so-called Bond King, who manages more than $1.2 trillion in assets, warns that protracted unemployment and low savings rate can’t sustain economic growth.  “I suspect it’s not as self-sustaining as they think,” said Gross, questioning Bernanke’s view that U.S. GDP growth will exceed 3% in 2011.

            Obama faces some daunting choices with the Libyan revolution.  If he does nothing, the crisis could drag on, continuing upward pressure on oil prices.  If he intervenes militarily, with or without NATO approval, oil markets could, at least initially, react violently.  Letting the Saudis boost output should help stabilize oil prices while Barack figures out how to help Libyan rebels get rid of Kadafi.  Barack has a golden opportunity to rid North Africa and the world of one more lunatic tyrant, adding, over the last 42 years, to Middle East chaos.  There’s never been a clearer link between oil prices and stabilizing the U.S. economy.  If Libya festers and oil continues to rise, the U.S. economy could sink back into recession. Whatever risks to Obama politically, he must look at the big picture, act decisively to get rid of Kadafi to stabilize world oil prices and continue to grow the U.S. economy. 

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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