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Is the Next Domino Ready to Fall in the Middle East?

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It appears that the next domino has fallen in the Middle East, with tensions now rising to a boiling point for the first time ever in OPEC-related countries. Economists have been concerned that the spark of revolution first seen in Tunisia could be disastrous in the Middle East if the residents of neighboring countries also attempted to oust their long-standing governments.

Today, we can add protests in Bahrain, Iran, and Libya to the list, with Iran and Libya ranked fourth and 17th in the world in oil per barrel production. These protests come just weeks after Hosni Mubarak stepped down after nearly 30 years as leader of Egypt, further fueling the other protestors' hopes for success.

The stock market loathes uncertainty, and this week's reaction should be no surprise. Oil prices are literally gushing higher. While this might be positive for oil companies who sell their product based on current prices, it's a worrisome trend from several other aspects.

For companies with interests tied to Libya, the safety of their employees and the continued flow of oil is paramount. Marathon Oil (NYSE: MRO  ) , ConocoPhillips (NYSE: COP  ) and Occidental Petroleum (NYSE: OXY  ) each have partial shares of or interests in a drilling operation in Libya. Although no work stoppages have occurred so far, this political instability could result in downward pressure on these stocks. BP (NYSE: BP  ) , on other hand, was forced to suspend Libyan drilling activity, and it has not commented yet on when activity may resume.

Dramatically rising oil prices will also hurt consumers. Rising gasoline prices can affect consumer travel habits, and rising input prices on everything from cosmetics to candles can take a similar bite out of discretionary spending. Companies like Elizabeth Arden (Nasdaq: RDEN  ) , which just reported better-than-expected earnings, could come under pressure in future quarters as their petroleum-based expenses rise.

As mentioned above, airlines are most directly in the line of fire for rising oil costs. As oil rises, the cost for jet fuel follows suit. Unless airlines have hedged their bets carefully, they could be looking at a world of pain. US Airways (NYSE: LCC  ) notably chooses to live dangerously; its CEO has told investors that the company will not hedge its fuel purchases. Though this saves the company millions in transaction charges, it could be fruitless if oil keeps rising. If you ask me, it's a big gamble.

This week's action is probably just the tip of the iceberg for events in the Middle East, and it will be in our best interests to keep up on current events for the time being. I'm treading lightly with my investments, especially amid a market looking for every reason to head higher. This may be the catalyst the market needs to create a healthy pullback, allowing investors to buy back in at a discount.

What's your take on the situation in the Middle East? Is this a global problem in the making, or a false alarm? Share your thoughts in the comments section below.

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Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He's thinking Green Acres might be the only place he can move to in order to avoid angry protestors. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On February 23, 2011, at 3:22 PM, bottomfisherman wrote:

    What happens if this wave reaches the Oil rich, non-democratic regime of Saudi Arabia?? Will changes be supported by Western Nations, can they handle the turmoil of oil supply interuptions or will they just remain silent and hope for whatever is best for themselves?

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