All eyes are on Libya and its infamous dictator, Colonel Qaddafi. Beyond his support of international terrorism and his murderous assault on his own people, Qaddafi is truly an odd duck. Whether he threatens martyrdom while wearing earmuffs on national TV, insists he can’t resign because he “holds no position,” or is accompanied by young gun-toting female bodyguards, his actions are eccentric, unpredictable and ruinous to everyone except himself. Qaddafi may appear cartoonish and buffoonish, but he is also very dangerous.
(His nearest dictator rival in weirdness, Hugo Chavez of Venezuela, who had already changed the national flag and coat of arms to his liking, proposed a unique time zone for Venezuela, set to the half hour, to “save time.” Dictatorial self-absorption knows no limits, I suppose.)
His quirks aside, Qaddafi and what happens in Libya are serious business, since Libya is one of the carefully balanced Jenga blocks of “frenemies” that is the Middle East. Trouble in Libya means trouble for everyone. Unrest there applies a “fear tax” on the price of oil. Oil is up markedly since the civil unrest and regime change in Tunisia, Egypt, and now Libya. Unlike Tunisia and Egypt, Libya is a major oil player, ranking 9th in world reserves, ahead of the US at #11.
Enlarge Map here.
What does oil price instability mean for your investment portfolio? It may seem obvious that higher oil prices would hurt stock prices by raising the cost of doing business and depleting disposable incomes. But real price data tells a different story. As the chart below shows¸ there is very little recent correlation between the Dow (blue), an index of global oil stocks IXC (red), and OIL, an exchange traded note meant to track the price of oil (green).
Stock prices change in reaction to many factors, real and perceived. Trying to base investment decisions just on future oil prices – which are themselves impossible to accurately predict – is narrow-minded speculation, in my view.
Remember that between December 2007 and December 2008, the price of oil went from $88 to $145 and back to $37. Meanwhile the Dow fell from 13,000 to 8500, under the weight of the mortgage meltdown, another unpredictable (or at least largely unpredicted) market influencer. Even if we knew in advance what oil prices would do that year, who would have guessed where stock prices were going?
Instead of guessing, we index. By holding a wide variety of asset classes over the long term, we avoid the temptation to jump in or out of securities based on the hour-to-hour news feed. Because the last thing we want to do is base investment decisions on the words, actions or costume changes of a quack like Qaddafi.