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Could Libya cause a market crash?

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by Peter Switzer

There’s nothing like fear wrapped in uncertainty inside an oil producing dictatorship to unsettle stock markets. And it comes when fears of a market crash are on the rise, despite the solid rally on the stock market.

For over 20 years the Yale School of Management has surveyed well-heeled investors about how probable a market crash was over the upcoming half-year.

CNBC says the latest survey in December, found around 75 per cent saw it as a 10 per cent chance and that compares to a 68 per cent reading in the previous April.

What is strange about this result is that it comes as the market was rising and generally fears jump when the market is falling.

But to put this into perspective, this indicator is not a blue chip guide but it’s worth seeing that there are plenty out there ready to push the panic button. The question is will Libya do it for the panic merchants?

Importance of Libya

The country is important because it’s a major oil producer and is an OPEC member. It delivers about two per cent of the world output of this black gold or Texas tea, to quote the Beverley Hillbillies!

And an Associated Press article has not helped calm nerves with Seif al-Islam Gadhafi, the son of Libya's leader Moammar Gadhafi, accusing everyone from drug addicts to the media for the protests.

But wait there’s more, worryingly.

Gadhafi Jr. says his old man would fight until "the last bullet".

Oil price spike

This is a new nightmare a company such as BP did not need after its Gulf of Mexico oil spill horror story last year, and you can understand why oil has spiked.

The oil price was up $4.13, or 4.8 per cent to $90.13 a barrel on the New York Mercantile Exchange, while Brent crude in London spiked $2.35 a barrel, or 2.3 per cent, to $104.84, having earlier struck a two and a half year high above $105, the Associated Press article pointed out.

It’s all connected

One of my colleagues at Sky News Business Channel asked why this social unrest rocks markets and I explained to her using what I call Sussan Economics, you know — this goes with that, goes with this…

What I said was this: “If protests disrupts oil production, it goes with oil prices spiking which goes with cost push inflation, which goes with an undermining of demand for both oil and other products, for example big cars. It also goes with higher costs for transport and manufacturing which goes with inflation and goes with cuts into profits which goes with lower share prices. It can even go with a recession!”

And this is why this Libyan civil unrest is a big deal. I don’t think it will, but it could trigger a market crash, but a dive is more likely, out of which the rally will re-emerge. But this rests on a quick resolution and whether this happens is anyone’s guess.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Tuesday, February 22, 2011