Monday, April 04, 2011

How Libyan Intervention Damages Global Economy

As I expected (to the extent I was wrong, it was because I underestimated how bad it would be), the intervention in Libya increasingly seems to create a worst case scenario where Qadaffi remains in control over western Libya while jihadist rebels are in control over eastern Libya and where the two sides continue to fight in an endless civil war.

In addition to being clueless about the nature of the rebels, the axis of Obama, Cameron and Sarkozy naively thought that they could destroy the Qadaffi regime through air raids alone. Yet as the Qadaffi forces have begun to disguise themselves to look like the rebels, it becomes exceedingly difficult for bombers to bomb them without risking to bomb the rebels. (something that they have already mistakingly done).

This means that the Libyan civil war, which would likely have ended two weeks ago without the intervention, could go on for a very long time. This means that oil prices will remain high, something that will benefit a few oil exporting countries, but greatly damage oil importers and damage the world economy as a whole.

With oil (WTI) reaching $108 today, it is about 30% higher than when the civil war started in mid-February. While other factors like QE2 could have contributed to this continued increase, other factors such as the disaster in Japan have counteracted the increase, so it is not far feched to attribute almost the entire increase to the Libyan civil war.

A short-term spike would have only created limited damage to the world economy, but the longer this persists the worse will the global economy be damaged.  The half-measure policy pursued by the Obama-Cameron-Sarkozy axis has already prolonged it by two weeks. While it can't be ruled out that somehow the civil war will be quickly ended, it looks increasingly likely to be prolonged, to the detriment of the global economy.