3/3/2011 7:07 PM ET|
Why Libya could tank the market
Stocks didn't crater during Egypt's revolution, but there are plenty of signs suggesting that Libya's turmoil could lead to more pain, even if Gadhafi remains.
It's different this time.
No, no, it really is.
Libya isn't Egypt, and the effects on the stock market this time will be different from those of the earlier crisis.
Different enough, in my opinion, that you need to factor them into your investment strategy. Yet not so different that you need to tear up your plans for 2011.
The short-term effects don't look all that different, I admit -- especially if you look mainly at stocks of developed economies. Egypt's revolution, as scary, exciting and important (especially for Egyptians) as it was at the time, created barely a ripple in U.S. stock markets. On Jan. 25, the "Day of Rage," the Standard & Poor's 500 Index ($INX) closed at 1,291. On Jan. 28, the biggest drop during the crisis, the index closed at 1276. By Jan. 31, when 250,000 protesters gathered in Tahrir Square, the index was up to 1,286. By the time Hosni Mubarak resigned on Feb. 11, the S&P had climbed to 1,329.
Why Libya matters more
The Libyan crisis is already longer than the Egyptian crisis. Demonstrations began on Feb. 15 in Benghazi, and the crisis was in Day 16 as of March 3. The Egyptian crisis from the "Day of Rage" to Mubarak's resignation ran for just 17 days.
At this point, U.S. stock market reaction to the Libyan crisis isn't a whole lot bigger. The S&P 500 closed at 1,328 on the day of the Benghazi protests, fell to 1,306 on Feb. 17, when Libya saw its own "Day of Rage" demonstrations, rallied, then fell back to 1,306 on March 1.
If you want to see "different," you have to look at oil prices. Oil traded at $89.11 a barrel on the New York Mercantile Exchange on Jan. 21, just before the start of the Egyptian crisis. It traded at $89.03 on Feb. 4, a week before Mubarak resigned. So far, so good.
In the case of the Libyan crisis, on the other hand, oil traded at $86.20 on Feb. 18, a few days after the initial Benghazi protests. Yet by March 2, the price in New York was over $100 a barrel, at $101.57.
It stands to reason. Egypt isn't a major oil exporter -- the country actually has to import oil to meet its domestic needs -- even as it increases its production of natural gas. Libya is the world's No. 12 oil exporter, with exports of 1.6 million barrels a day. That production is especially hard to replace, because Libya is a major source of light, sweet crude, which is easy for the world's refineries to handle. Saudi Arabia would have no problem right now ramping up production to meet any shortfall from Libya; the Saudis enjoy about 4 million barrels a day in excess capacity. But much of its oil would be heavy, sour grades that are harder to refine.
The differences between Egypt and Libya also argue for a difference in how oil will behave when the latter's crisis is over.
In the case of Egypt, any spike in oil prices was justified only if you believed that the crisis would endanger the 4 million barrels a day that flow through the Suez Canal and into a major European pipeline. Take out that supply route and the shortfall equals Saudi Arabia's total excess oil capacity. When the crisis ended and the canal and pipeline were clearly still intact, there was no reason for oil not to drop back to its former price.
In the case of Libya, there are well-founded worries about damage to its oil fields, pipeline and terminal shutdowns, and the flight of experienced engineers behind them. It sure doesn't calm nerves when Moammar Gadhafi threatens to blow up the country's oil fields -- especially when he's clearly capable of just about anything. Reports out of Libya testify to falling production during the crisis. The state-owned National Oil Company of Libya, which normally pumps about 420,000 barrels a day, says production has dropped to 100,000 barrels a day.
No one knows how much damage has been done to oil fields and transportation systems -- and no one will know until the war between Gadhafi and the protesters is over. That nervousness will add to oil prices. Nonetheless, I expect that the end of hostilities will show the damage is less than is feared right now.
What if regime change spreads further?
I don't expect oil prices to drop back immediately to their precrisis levels, as they did after Egypt. No one expects that protesters in Libya stand a chance of toppling the Gadhafi regime. There is no organized opposition and Gadhafi has kept the army splintered so it can't offer the kind of alternative institutional power that pushed Mubarak out the door in Egypt. And this is one of the world's most oppressive and brutal regimes, with no apparent compunction about using any measure of force against its opponents. It is hard to imagine that protesters could put it on the ropes.
Still, it's worth asking: If Gadhafi falls when everyone thinks it is so unlikely, then what regime is not in play? (The high population of young people in these countries, which has economic benefits, has also contributed to unrest. For more on this, see my recent column on the demographic dividend.)
VIDEO ON MSN MONEY
Get rid of the **** speculators that drove the price up and oil prices drop to $50 a barrel because of the simple economic factor called supply and demand.
You have 10,000 people buying oil contracts that have no interest in taking possesion of the oil and you have 1,000 people that need oil. That creates a false demand for oil and makes it more expensive.
No speculators no false demand.
U.S. Oil Discovery- Largest Reserve in the World
Stansberry Report Online - 4/20/2006
Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world. It is more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. In three and a half years of high oil prices none has been extracted. With this mother load of oil why are we still fighting over off-shore drilling?
"This sizable find is now the highest-producing onshore oil field found in the past 56 years," reports The Pittsburgh Post Gazette. It's a formation known as the Williston Basin , but is more commonly referred to as the 'Bakken.' It stretches from Northern Montana, through North Dakota and into Canada . For years, U. S. oil exploration has been considered a dead end. Even the 'Big Oil' companies gave up searching for major oil wells decades ago. However, a recent technological breakthrough has opened up the Bakken's massive reserves..... and we now have access of up to 500 billion barrels. And because this is light, sweet oil, those billions of barrels will cost Americans just $16 PER BARREL!
They reported this stunning news: We have more oil inside our borders, than all the other proven reserves on earth.. Here are the official estimates: - 8-times as much oil as Saudi Arabia
- 18-times as much oil as Iraq - 21-times as much oil as Kuwait
- 22-times as much oil as Iran
- 500-times as much oil as Yemen
- and it's all right here in the Western United States .
Lots of noise about little things, keeps minds off big problems. Has everyone forgot the trillions handed to the banks, and the printing press running day and night. Hitler could not have printed paper at this rate. Hitler's excuse was to save Germany. Look at two rounds of inflation in Germany after the wars, and we don't even have an excuse for printing paper. How long can this go on?
We are being raped at the pumps. It is not the middle east, it is by speculators and our government who turns a blind eye to this practice, and it's killing any advancement our economy might be making. It warms my heart to know our government is so concerned about helping the middle class! When congress extended the Bush tax cuts AND cut the payroll tax by 2%, I was planning on buying a second home and a new Range Rover. Sadly, now I must use those enormous savings to pay for fuel just to get back and forth to work. Man, just when I was starting to get ahead. <Sarcasm>
Here we go again with the media pumping out negative information.
Seriously, MSN money editors, there's got to be a way you can post more positive articles with ways for your readers to to save, and strategies that work in the wake of this chaos.
you ARE being sarcastic, right??? as GOP are getting rid of min wage entirely so good luck finding any workers in your business or service for that range rover as americans aren't educated enough to change their own oil. if you don't own your own business, and GOP hates small business, you aren't going to be buying any home or any car any time soon.
get off oil now and stop subsidizing oil cos to the tune of billions a year and helping folks like gaddafi attack their own citizens....
and 8 billion in profit each quarter for cos. like exxon to turn around and ruin our own environment is insane....govt. doesn't care; it is owned by big oil and we need fuel tax right now to even pay to have roads....
GET OFF OIL NOW!!!!
Just like Einstein said, "I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones."
The Bakken oil shale region is no secret, has been explored since 1980, and has been known about for over 50 years. There are currently hundreds of fractureing wells in place extracting oil right now. There are dozens of web sites to look this up, but no where will you see in a reputable web site a claim of 500 billion barrels that is actually recoverable through fractureing. Fractureing also has a down side to it, as it does pollute ground water supply's along with some other issues that are also controversial. And remember if you can that these areas within the Bakken also produce a large amount of grain, and live stock. But if you don't care about water, or food, then by all means continue. Also, Shale oil is not 'Light, Sweet crude' as claimed by one on this site. In Canada the Bakken region shale oil extraction is being done by strip mining.
So, Jay and Sunny, there is just a little more to this than meets the casual eye, and the information is out there.
No argument Rich05. But if you are powering vehicles with Hydrogen no matter the method, would that not free up a great deal of oil that is currently being used to power vehicles? The answer is yes it would, and that is a start, and a good one.
I like you Rich05. You are a thinker, not a stooge for conventional wisdom, or the lack of.
Such an intelligent article, the best I've seen on this topic. We can always rely on Jubak, who usually has a handle on things. Sorry I can't say the same for some of the Drama Queens who posted comments here. I'm surprised you guys are even reading this stuff. Go read Cramer for God's sake! This article is for Mommy and Daddy to read!
That said, I think it's time I go learn how to WELD and FORAGE, or speak Chinese, whichever's easier. ;)
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The final week of August represented one of the quietest stretches for the stock market so far this year. The first four sessions of the week produced the ... More
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