Oil, War, and the Stock Market

The affects of the war in the Middle East are spilling over into the financial world today, as oil broke the $77.00 mark and hit an all time high. It is important for the average investor to understand why this happened and what the affects can/will be.

The war between Israel and Lebanon is escalating, and the outspoken opponenet of Israel, Iran’s President Mahmoud Ahmadinejad, said that if Israel makes any action against Syria, that Iran will join in the war against Israel. This is a legimiate possibility due to the strong Hizbullah presence in Syria. (Hizbullah is the militant group currently fighting Israel.) If Syria makes any moves against Israel, they will justly retaliate, and Iran, if they hold true to their word, will join the war.

Iran, as an oil producer and a country with a strong appeal and influence on Muslim extremists, has the power to drive oil prices higher. As most of the world’s oil comes from Arab-Muslim countries in the Middle East, a war with Iran is not an optimal situation.

As a strong Israeli ally, the United States could easily be drawn into the conflict. This would drive US oil costs higher, and as a large portion of US oil refineries were destroyed by Hurricane Katrina, cost will only be rising.

High oil costs scare investors. Almost all US companies (outside of the tech sector) need oil in some way. When oil costs go up, shipping costs go up, production costs go up, and travel costs go up. These increasing costs cut into profits, and investors pull out their money, forcing stocks down.

Is there any relief in sight? Not at the moment. Costs are only going up at the moment. This will hit investors in the markets, and the average American at the pump.