Wednesday 22 November 2017

Fall of Gaddafi after 40 years is not a moment too soon for global economy

James Saft

FOR Libyans the fall of Muammar Gaddafi comes about 40 years too late, but from the point of view of the global economy it is not a moment too soon.

The apparent end of the reign of Gaddafi, whose whereabouts were unknown on Monday after rebels took Tripoli, will take pressure off the price of energy, especially in hard-hit parts of southern Europe, and thus ultimately may remove roadblocks to further easing by either the ECB or the Federal Reserve.

Brent crude futures, the key European measure, fell by as much as 3pc on Monday following the taking of Tripoli by Libyan rebels before settling about 1pc down, while the US measure rose about a third of a per cent.

Libya accounts for about 2pc of global oil production and in particular has supplied much of the oil consumed in Italy.

While experts caution that it may take some time to restore production and exports, the nightmare option of mass sabotage by the falling regime now seems unlikely.

Regime change also opens up the possibility that production and exploration in Libya are more competently and aggressively pursued than they had been.

Corruption and kickbacks are rife in Libya, and while that may or may not improve, if it does, look for production figures to get better over the longer term.

Lower energy prices are an unalloyed good at this point for the global economy.

High gasoline and heating costs act as a brake on consumer demand, something the hard-hit southern eurozone nations can ill afford as they descend into a vicious cycle of austerity and economic contraction.

To be sure, the impact of Libya, even at best, will be small, especially considering the fundamental challenges facing the global economy.

Lower gas prices will help consumers in Milan and Little Rock, but it does nothing to improve the equity positions of banks in Italy, and precious little to underpin house prices in the US.

That said, it is about time the global economy caught a break, and if this is the one it is going to get, well, things could be worse.

With any luck, falling energy prices will give the ECB reason, or at least plausible cover, to reverse their disastrous recent hikes in interest rates. The ECB has hiked key rates twice since April, by a total of half a percentage point to 1.5pc.

That, simply, is exactly the last thing the eurozone needs as half of it slides into recession and the other half considers if it wants to pick up the cheque or run for the exit.

At its last interest-rate-setting meeting two weeks ago, the ECB said risks to inflation were still to the upside and that the risks to the economy were balanced, indicating it was at that time considering yet another increase.

Rising oil, gas and electricity prices have contributed strongly to inflation in key measures considered by the ECB, so a reversal would allow the hawks to side with the few doves.

Even if the ECB does nothing, and given its track record that is perhaps the most likely outcome, lower energy prices will help consumption, especially in Italy, and will, at the margins, help to make uncompetitive southern European industries a bit better able to win business internationally.


Again, energy will do nothing to help the banking industry, nor to smooth the path towards fiscal union.

In the US, the effects of a new Libya will be less, but even there it will perhaps make the Fed's position slightly easier.

While the Fed concentrates on core inflation, which does not include energy prices, energy costs obviously have a strong impact on inflation over time, and on inflation expectations, which often look through the core figures to focus on the actual out-of-pocket pain at the pumps.

If energy prices fall and the fall is sustained, that will remove one argument against making some new attempt at easing monetary conditions, perhaps even by a third round of quantitative easing.

That said, it is unclear if QE3 will come to pass even if oil drops dramatically, and even less clear if it would be a good idea under any circumstances.

There is still strong internal and political opposition to QE, and for that to be resolved the Fed may need to see a continuing weakening in the economy and employment.

At any rate, QE has a poor record of helping anything other than risk assets, and those temporarily.

And of course, the ultimate irony is that should the Fed get radical again by buying up bonds, that in itself will likely fuel a rally in oil which may undermine much of the benefit. That's what happened last time, after all.

James Saft is a Reuters columnist. The opinions expressed are his own.

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