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Monday, February 28, 2011

Arab Spring in Libya: Crisis for the World Economy

Though the world might not have watched the events in Tunisia or Egypt with much interest, Libya is certainly an eye-opener. The political situation in Libya could be one of the first signs of an impending economic crisis of global proportions.

The Potential Fuel Crisis
It may be argued that Libya constitutes only 1% of the total oil exports (15th largest exporter in the world), but this is enough volume to make it the third largest oil producer in Africa and an OPEC member. As the production softens in the country, the trickle-down effect is being felt worldwide, pushing the crude prices to record levels. The Libyan effect is particularly significant in the light of the happenings in the rest of the world. The Jasmine Revolution covers countries like China, Gabon, Libya, Bahrain, Algeria, Egypt, Morocco, Iran and others. Though, not all of them are equally important in terms of fuel supplies, Libya is the 15th largest exporter of crude, while Algeria and Iran stand at 12th and 6th rank, respectively. A simultaneous sag in exploration from all these countries can prove to be extremely costly. Crude prices touched new highs, briefly breaching the $100 per barrel mark. Further spike to anywhere between $150 and $220 is expected if the situation remains volatile for some more time.


Effect on Other Economies

Currencies and Commodities Firm Up

Emulating other times of crisis, precious metal soared on the back of increased buying. Silver beat 30-year record to touch the historical high of $33 per troy ounce on Friday, February 25. On the other hand, gold closed at $1,408 per troy ounce. Safe haven currencies, Swiss Franc and Yen gained 1.8% each. The Libyan uprising has particularly impacted the crude supplies to Europe. Consequently, Euro is constantly losing ground against other major currencies.

Developed and Developing Nations are Equally Affected

In the wake of the Libyan crisis, key U.S. indices like Dow Jones Industrial Average, Nasdaq, and S&P 500 have taken a beating. Though it may not be directly affected by suppressed fuel exports at this juncture, the rising prices in the international market may retard its recovery process. Europe is already feeling the heat. This, combined with its own ongoing problems of high sovereign debts and slow economic recovery, has become a major cause of concern for the policymakers. Japan’s industrial exports, which form a major part of the GDP, depend upon uninterrupted fuel availability and oil imports virtually form the lifeline of Japanese Economy. Its astronomical level of public debt (almost 200% of the GDP) and weak economic recovery put it in an even tighter spot. Korea, being the 5th largest oil importer, is heavily dependent on the exports from Middle East to fuel its growth story. As it emerges from the recession, it is already struggling from inflation and experts believe that any further pressure on the fuel front can invite stagflation. Other developing nations, like Brazil and India, are also not untouched from the international political events. These countries are already plagued by domestic inflationary conditions and rising fuel prices have further put a damper on their growth.

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