Oil Discomfort is Overblown

Stock market investors are very nervous about the Middle Eastern unrest predominately because of fears about disruptions to oil supplies.  The panicked opinion obsesses about the possibility for a double-dip recession.  Blah, blah, blah.

I consider this possibility to be almost impossible.  The reason is that the most important thing to focus on is not the overall level of oil prices, but the marginal increase in oil prices, and their affect on individuals’ and businesses’ profitability.  Resident in the collective consciousness of folks at the top of the power food chain is the oil embargo and commensurate recession of 1973-1974.  Back then the United States’ economy (hell, most economies were) was based on machine-intensive manufacturing.  So oil was very, very, very important to overall economic stability.

Right now economic growth in the First World is being overwhelmingly driven by innovative ideas and people well skilled in deploying those ideas throughout other businesses (think: consulting, software platforms, server farms, etc.).  Oil is a much less important resource to economic stability now than it was almost 40 years ago.

Had this shock to energy prices happened even 18 months ago it would have derailed the economic recovery.  Right now, it’s my opinion that speculators are manipulating commodities markets and certain momentum-type stock market participants do what they always do when they get a whiff of smoke: they yell FIRE!

In short, I would buy on dips.  The economic recovery in North America is SOLID.  Who should be afraid?  The Europeans; who can’t seem to generate much innovation or economic growth.  The Chinese, who already have massive inflation to contend with and do not need increased oil prices pumped through their manufacturing intensive economy.  But what will happen?

What will happen is that the perception of the “new radically changed reality” will be seen to be a blip in oil supplies and the panic will subside and those looking for the sky to fall will move on to the next fear-inducing news event.  What goes on in Libya can be managed by other oil-producing nations.  What is going on in Libya is not a permanent state of affairs.  Whomever wins Libya, Ghadaffi and his supporters, or the rebels, will be in the business of selling oil.  Whomever wins Saudi Arabia (if it should even come close to going that far) will be in the business of selling oil.  Any disruptions are, at most, 5-6 months in the making.  Much more likely is that disruptions are in the range of 1-2 weeks.

How can I say this so confidently?  Because other than oil, why would anyone want to be in power in these countries?  Exactly.

I recommend strongly, buying the market on any dips that take the DJIA below 12,000 points.

Jason