With oil prices barreling past $100 due to turmoil in the Middle East and North Africa, America’s fragile economic recovery is at risk.
On Monday’s night’s “Mad Money,” on CNBC, host Jim Cramer said foreign policy actions — such as NATO intervention in Libya or stabilization efforts in Bahrain and Saudi Arabia — would thwart the oil price surge and in turn bring a rally in the stock market.
“We’re in a tough moment here. One way, the market is just beginning to wake up to the hideous reality we’re hostage to Col. Gaddafi and the Middle Eastern dominance,” Cramer said. “Do not get too depressed, though. The moment we get rid of Gaddafi, I can see the Dow rally as much as 1,000 points. Just don’t know what level it’s going to happen from. Why do we care so much about one little tin-pot dictator in a country that is not one of the top 10 producers of oil? Simple: Until the tensions in North Africa get resolved there’s a strong possibility that oil prices keep soaring, maybe even back to where they peaked in the great short-squeeze in 2008. That’s $147. It happened once before. Nothing’s change[d].”
Cramer likened the market’s recent movements to those ahead of the first Gulf War in the 1990s, when rumors around Saddam Hussein’s invasion of Kuwait moved prices. He explained that only after NATO stepped in did the market truly rally.
“I think that means all rumors will be false until you see NATO move against the guy,” he said. “How do we break this pattern? We need to see the market go down and stay down – not rally at the end of the day and then we need good news in the form of one – NATO action against Gaddafi, two – the U.S. government selling futures, preferably the July contract, more on that later. Knowing that it’s got all the oil it needs to be able to sell futures in the strategic petroleum reserve, and three – the kings of Bahrain and Saudi Arabia need to be told they aren’t going to be buried under the pyramids like [Hosni] Mubarak in Egypt. They need to be part of the cornerstone of the next new stadium built in the Middle East.”
Cramer said the federal government would have to tap into the strategic petroleum reserve, in conjunction with military action.
“I don’t think this plan is a pipe dream,” he said. “If Libya is resolved in a Ronald Reagan way, meaning that we bomb the guy except for this time we hit him and if we tell the rulers of Saudi Arabia and Bahrain that they’re our buddies, our pals, and our friends and the government sells oil futures out to July in the strategic petroleum reserve, then this market will go through the roof. My plan is both logical and doable. The only thing it requires is some presidential horse sense. Can we bet on it? I honestly don’t know. But I don’t want to paint too bearish a picture.”
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Once this comes to together, he said the price of oil will drop immediately, but chasing the rallies inspired by rumors will backfire.
“While it was foolish to chase the rallies in 1990, you know what it was even more foolish? To leave the table,” Cramer said. “As we eventually rallied and rallied hard when the U.S. came to the rescue, you just couldn’t trade the market to any satisfaction when it was up because, if you chased – you ended up with hummus all over your face. That’s why I can’t get too negative here and it makes sense to hang on and stay in the game. Here’s the bottom line: We don’t want to go home too long, meaning holding on to too much stock. Maybe Gaddafi bombs the oil fields or maybe the U.S. makes castigating remark about Arab monarchies. But, we don’t want to go home too short either because if the government sells oil futures and says the kings of Bahrain and Saudi Arabia are better than King George VI, if not Colin Firth himself and NATO says enough of Gaddafi, this market will rip 1,000 points higher and oil will drop 10 bucks in the blink of an eye. So conclusion: Stay cautious but don’t get too negative.”