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NEW YORK (TheStreet) -- Just when you thought it was safe to dive back in the stock market, with indices practically back to pre-crash levels, Muammar Gaddafi reminds us why Ronald Reagan called him a "mad dog."

It may seem crass to worry about the stock market when hundreds, if not thousands, are being slaughtered by that butcher. But it's reasonable to wonder: Are investors like our policymakers, who thought that Hosni Mubarak was a decent guy, if a bit old-fashioned, who had to be given another chance? Has the market joined the CIA and State Department in failing to properly judge the importance of the unfolding events? When the Dow sank 178 points on Tuesday on oil-price worries, as Libya used protesters for target practice, was that a temporary burp in the indices or an under-reaction to what may be a lasting, negative change in the region?

Now, I'm sure kneejerk contrarians would tend to view the latest market setback as either a long-overdue market correction or as an example of "Mr. Market," the manic-depressive embodiment of the market coined by value investor Benjamin Graham. But my hunch is that we're just seeing the beginning of a major instance of political risk running wild.

There are several factors at work here, none of them pretty:

Oil.

As Elliott Morss pointed out

in these pages on Tuesday, Libya is the 11th-largest oil exporter. True, only 5% of its oil imports go directly to the U.S. But oil is fungible, and the oil market is global. Saudi Arabia said on Tuesday that OPEC will meet any supply shortages, but the Saudi oil minister was quoted as stopping short of saying oil production will be increased, that oil price increases were caused by speculation and fear. Translation: OPEC will not meet any supply shortages. By the way, isn't it wonderful to know that we have to trust OPEC and the open-minded, selfless Saudi monarchy to keep energy prices stable?

Let's forget the other tinhorn dictatorships and unstable thuggeries that are on the top-exporters list for a moment and focus on the Saudis, the No. 1 oil nation. It's no secret that the Saudi regime is terrified by the protests elsewhere in the Middle East, and with good reason. It's hard to find a more tyrannical regime outside of Myanmar. The conventional wisdom is that Saudi Arabia is safe, and that the royal family is firmly in control. But if there is a paradigm shift under way in the region, why should it spare the Saudis?

If oil continues to climb, airline stocks are going to be decimated. The Amex airline index fell 5.2% on Tuesday, and

United Continental Holdings

(UAL) - Get United Airlines Holdings, Inc. Report

fell 9%, while

AMR Group

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(AMR)

and

U.S. Airways

(LCC)

each declined 5.7%. All because of the excesses in a country run by a nutjob. Think about that for a moment: He's screwing our economy without even trying. Gaddafi has said he's going to die a "martyr." As my grandmother used to say, "From his mouth to God's ear."

Israel.

As long as we're discussing scary scenarios, how about this: another major Arab-Israeli war? By that, I mean not another "asymmetrical" struggle with Hamas or Hezbollah but an old-fashioned, tank-on-tank conflagration. If Egypt scraps the Camp David accords, and if the Muslim Brotherhood becomes part of the governing structure of Egypt, that possibly goes from "unthinkable" to "unlikely but not beyond the realm of possibility." The media has tended to underplay the impact on that country of the protests sweeping the Arab world. But as Israel's ambassador to the U.S. gently pointed out the other day in a New York Times op-ed, even the secular protesters in Egypt have sought to end the peace treaty and cut off natural gas shipments to Israel. The Jewish state is justifiably jittery to begin with -- note the reaction to those two Iranian ships passing through the Suez Canal -- so imagine what would happen if Egypt tries out a bit of 1960s nostalgia and returns to the hostility of the Nasser era.

Iran.

You don't hear much about protests in Iran, because this

uber

-police state has taken the straightforward step of telling journalists: Don't report on the protests or we'll kick you out. And, by golly, it has worked! So we don't even know the extent of the unrest in that loony bin of a country. What we do know is that Iran's proxies in Lebanon have 50,000 missiles pointed at Israel, and that it celebrated the unrest in Egypt by carrying out the aforementioned stunt in the Suez Canal. As long as we're reflecting on possible doomsday scenarios, how about this one: The mullahs, feeling the end is near, decide to launch those missiles at Israel? Israel invades Lebanon, etc., etc. (see preceding paragraph).

Admittedly, I'm no expert on the Middle East. I'm just trying to apply some common sense to the situation. I'd dearly love to be proven wrong about all of this.

Gary Weiss has covered Wall Street wrongdoing for almost a quarter century. His coverage of stock fraud at BusinessWeek won many awards, and included a cover story, �The Mob on Wall Street,� which exposed mob infiltration of brokerages. He uncovered the Salomon Brothers bond-trading scandal, and wrote extensively on the dangers posed by hedge funds, Internet fraud and out-of-control leverage. He was a contributing editor at Conde Nast Porfolio, writing about the people most intimately involved in the financial crisis, from Timothy Geithner to Bernard Madoff. His book "Born to Steal" (Warner Books: 2003), described the Mafia's takeover of brokerage houses in the 1990s. "Wall Street Versus America" (Portfolio: 2006) was an account of investor rip-offs. He blogs at garyweiss.blogspot.com.