February 22, 2011

The Impact of Libyan Protests on Global Markets

Over the weekend, investors have shifted concern over tensions in the Arab world to Libya, where protests over the long time rule of Col. Moammar Gadhafi have caused increasingly violent government crackdowns. Investors in energy markets have shown particular concern, as Libya is the first major oil producing state to face the possibility of a new regime. Although Egypt is a major conduit for Libyan oil, it is not itself a major oil producer, nor is Tunisia. Libya on the other hand produces 1.8 MN barrels of oil a day, and recent tensions have caused oil prices to climb.

Although news from Libya appears to have rattled markets globally, it is important to keep the true impact of the protests in context. Although Libya is a net exporter of crude, it is only the 17th largest source of oil globally, with no direct exports to the United States. Thus the concern from investors that Libya could cease to contribute to oil production seems overblown. Not only does Libya represent a relatively minor percentage of production, but OPEC and other oil producing states could absorb the deficit by increasing their own production. This also assumes a full stop of Libyan exports, which is unlikely. Finally, should all Libyan exports cease and excess capacity not be absorbed, it is should be noted that the International Energy Agency has over 1.6BN barrels (the equivalent of about six months of U.S. imports) of reserves which can be tapped should global production contract.

The true concern is therefore not Libya so much as the fear of contagion to other Arab states, notably Iran, and potentially Saudi Arabia. While we do agree that political risk in the Middle East will remain elevated, we believe an increased risk premium could actually benefit the African continent in the long term. Heightened political risk across the Arab world serves to exacerbate concerns among investors that oil production remains overly concentrated in a small number of potentially turbulent states. At the same time, a number of nations – many of them in Sub-Saharan Africa – have identified potential oil reserves which have yet to be tapped. As the risk premium for oil rises in the Middle East, interest in diversifying production will rise, as will the willingness of investors to commit capital to projects across Africa.

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com

1 comment:

  1. Does anyone remember Tiananmen Square? Was that the beginning or the end for China?? Go Africa!!

    ReplyDelete