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February 21, 2011 at 09:41 AM
LONDON (AP) — Fears that Libya is heading toward deepening chaos hit stocks Monday and pushed oil prices sharply higher.
With reports suggesting that over 200 people have been killed in clashes across the country, which have spread to the capital Tripoli, investors are getting increasingly worried about the escalating violence in one of Africa's biggest oil producers.
Those concerns were heightened by a statement from Seif al-Islam Gadhafi, the son of Libya's longtime leader Moammar Gadhafi. Blaming everyone from drug addicts to the media for the current turmoil afflicting Libya, he warned that civil war was a real possibility and that his father would fight until "the last bullet."
Unlike Tunisia and Egypt, which have already seen popular uprisings that deposed longtime leaders, Libya is a member of producer cartel OPEC and has a direct impact on global oil production.
The country is one of the world's biggest oil producers, accounting for around 2% of global daily output, and has the biggest proven oil reserves in Africa. Already three leading oil companies, Italy's ENI, Norway's Statoil and Britain's BP, have already said they are pulling some employees out of Libya or preparing to do so.
"Libya is the first major oil exporter to be engulfed by the crisis and the first to see significant disruption to oil production," said Julian Jessop, chief international economist at Capital Economics.
Unsurprisingly, the main impact was in the oil markets. Benchmark crude for March delivery was up $4.13, or 4.8%, at $90.13 a barrel in electronic trading on the New York Mercantile Exchange, while Brent crude in London spiked $2.35 a barrel, or 2.3%, to $104.84, having earlier struck a two and a half year high above $105.
Rising oil prices are a particular worry for investors as they reinforce fears over inflation and raw materials costs. They also stoke fears of a big drop in global demand levels, as evidenced in previous oil price shocks in 1973-4, 1979 and 2008.
Given that unappetizing backdrop, investors' appetite for risk in other markets fell sharply. When risk appetite is low, investors usually look for shelter in the perceived safe havens of the U.S. dollar and gold at the expense of more risky investments such as stocks.
"Political risk is hanging over a big proportion of the world's oil supplies," said Simon Derrick, an analyst at Bank of New York Mellon. "I can see safe haven buying the natural outcome of all this."
In Europe, Germany's DAX index closed down 105 points, or 1.4%, at 7,321.81 while the CAC-40 in Paris fell 59.73 points, or 1.4%, to 4,097.41. The FTSE 100 index of leading British shares ended 68.19 points, or 1.1%, at 6,014.80.
Markets in the U.S. were closed Monday for the President's Day holiday.
