Libya’s liberation: Just an economic blip?

Posted on August 23, 2011


Muammar al-Gaddafi

Gaddafi: Where is the strongman now?

Larger global issues will impact asset prices more than the return to the market of 1.4 million barrels per day.

All else being equal, news of the fall of Muammar Gaddafi’s regime in Libya would have caused a minor downward spike on the oil price chart and a bit of a relief rally on equity markets. But, all else is not equal now, is it. While the possibility that about 1.4 million barrels of sweet Libyan crude will soon return to the export market may act as a mild dampener on oil prices, global economic pressures will have a more telling effect.

Crude prices have come under short-term pressure and uncertainty remains over what the new regime in Libya will look like. A spokesman for the rebel-controlled Arabian Gulf Oil Company said on Sunday that it could restart up to 180,000 barrels a day of production soon. Once security is guaranteed for the facilities, production would begin two weeks after that point, the spokesman said.

However, investors would probably do well to look at wider economic developments, primarily in the western hemisphere, as the escalation of bad news from there is likely to dominate price movements of commodities and equities. United States Federal Reserve chairman Ben S. Bernanke’s speech at Jackson Hole, Florida, on Friday will be closely watched for signs of a third round of quantitative easing and other measures to prevent a double-dip recession in the world’s largest economy. The dollar continues to weaken against the euro, yen and Swiss franc, posing dilemmas for the capital exporters of the Arabian Gulf.

The prospects of a W-shaped recovery are gaining momentum in Europe as well, with Germany’s latest GDP numbers adding to the gloom. Angela Merkel and Nicolas Sarkozy’s joint press conference last week added to speculation that the Eurozone is becoming a two-tier political economy with France and Germany firmly at the top. But Mer-kozy rejected the prospect of Eurobonds as a way out of the debt crisis plaguing the Eurozone’s peripheral nations. They also said there would be no increase in the Financial Stability Fund. What these political decisions mean for the struggling economies is as yet unclear.

Markets are likely to tread water this week, at least until they get an idea of the cards that Bernanke is holding up his sleeve. The real worry for global risk is that the likes of Bernanke, Jean-Claude Trichet and Charlie Bean may have run out of aces to play.