Wednesday, February 23, 2011

The Easy Stock Market

The Dow Jones Industrial Average has dropped almost 300 points in the last two days, and oil prices have popped up to $100 a barrel. Gas will reach $3.40 to $3.50 a gallon in a week or two. This, all because unrest in the Arab world has upended the government of Libya, a major oil producer. Libya's erstwhile leader, Muammar Khaddafi, is holed up with several thousand loyal troops. Much of Libya is now in rebel hands, and some military units have abandoned Khaddafi. His survival looks increasingly unlikely. But if his forces are well-provisioned, the fighting could continue for who knows how long.

Libya has no governmental structure (no constitution, no formal process for succession of leadership). If Khaddafi falls, a hundred claimants to leadership could step forward. That would take a while to sort out.

Oil production in Libya is grinding to a halt, and may stay halted for a long time. Other OPEC nations might be able to increase their production enough to fill the gap. But much of the new production would be sulfur-heavy, expensive to refine crude, not the light, sweet, low-polluting crude that Libya produces. And that assumes OPEC would be willing to increase production instead of cash in on the higher prices.

Gas prices have already drifted up 15% in the past six months. At some point, rising oil and gasoline prices, declining real estate values, continued high unemployment, stagnating (or in the case of many public employees, falling) incomes, and cutbacks in state and federal government spending will combine to chill the economic recovery. Whether we fall into recession again, or just idle in neutral, things won't be good.

It's no surprise the Dow fell so abruptly. Today's stock market is bipolar, either delirious with joy or down in the dumps. The market's recent meteoric rise created the conditions for an abrupt pullback. Whether it's easy come or easy go, we have an easy stock market.

Policy wonks on both the left and right will renew calls for energy independence. The programs they recommend will differ. None will be simple or cheap. However achieved, independence will be expensive.

The economic distress caused by volatile oil prices, the 5,000 plus American dead and hundreds of billions of American dollars spent fighting the Iraq and Afghanistan wars, and the need for expensive continued U.S. presence in an increasingly unstable region haunted by seemingly unstoppable nuclear proliferation make the cost of inaction extremely high. That doesn't mean there will be action. America's divided government is struggling to accomplish anything. Thus far in 2011, it's mostly followed past policies of expanding the federal deficit by cutting taxes and increasing spending. A gargantuan problem such as energy independence may be impossible for the pushmi-pullyu in Washington to handle. Save your nickels. Cash money will command a premium as uncertainty grows.

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