HedgeFundLive.com - Over the past several weeks, investors witnessed the dramatic rise in the price of oil, which now sits above $100 a barrel. The unrest in Libya, which was influenced by the revolutions stemming from neighboring North African nations Egypt and Tunisia, have led some investors to believe that oil prices have the potential to hit $150/barrel. Some traders are even betting on oil prices rising to $200/barrel. If such a thing were to unfold, history tells us that we should be afraid. Shocks in oil prices have led to or were significant contributors to past US recessions, most notably in the mid-1970s, 1980, 1990, 2001, and 2008-2009. Should the turmoil in North Africa spread to countries in the Middle East, such as Saudi Arabia, which produced nearly 9.1 million barrels of oil a day in February, then such price rises and ensuing pandemonium may be quite likely.
Though such concernment is valid, I am here to write about why such occurrences are unlikely and possibly overblown. The increase in oil prices due to disquiet in Libya has already been priced in and the cut in supply from 1.4 million barrels of oil per day produced by the strife-ridden nation to a paltry 300,000 barrels of oil per day is sustainable due to an excess supply of nearly 4 million barrels per day produced by Saudi Arabia. Furthermore, the so-called Saudi ‘Day of Rage’ was exaggerated and demonstrated the robustness of the Saudi government against unrest and political outcry. Though the minority Shia population continues to be critical of the current regime, King Abdullah has offered concessions in an attempt to insulate the country from riots and revolutions. And so far, there have been no serious uprisings from the major oil exporter. Though there may be a slight slowdown in the US growth rate, any major downturn is improbable. The automotive sector and overall US consumer spending may be hindered from the current rise in oil prices, but we should continue to expect great earnings from corporations, positive economic numbers, and overall bullish sentiment.
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