Libya's Butterfly Effect on the Global Economy

According to Wikipedia: The butterfly effect is a metaphor that encapsulates the concept of sensitive dependence on initial conditions in chaos theory; namely, a small change at one place in a complex system can have large effects elsewhere

The world is a complex system, and the shake up in Libya has a large affect on international business. The flow of money is experiencing a wave of volatility reminiscent of the paper currencies floating about through the storms of global politics. This is the essential theory behind the butterfly effect; applied to the economics behind resource and capital constraints.

Libya is an energy rich country sharing the pains of freedom fighting protesters as seen throughout North Africa and the Middle East (especially Egypt, Algeria, Tunisia, and now Iraq). It's much hated dictator Moammar Gadhafi has no intention of stepping down. His first video announcement in response to the protests only denounced rumors that he has fled to Venezuela. Gadhafi stated that he will remain in Libya and 'die a martyr'. The protesters raised their voices in response to the stubborn dictator. Ghadhafi then opened fire on the streets of Tripoli, only to increase the violent conditions throughout the region.

The unrest in energy rich North Africa and the Middle East created panic in dependent industries. For one, the rich dictators and members of the North African elite quickly increased their cash base in Switzerland, causing the Swiss Franc to soar against all other currencies. However, as Switzerland remains a nation of secrecy in terms of banking, they have a responsibility of transparency as a 'neutral' country. Switzerland's Federal Department of Foreign Affairs placed a freeze on Gadhafi's assets in the country in support of the world's calling for his resignation.

Why not the US Dollar as the desired safe haven? Too many structural issues in the West and the risk of it's depreciation in value as oil rises, makes it less attractive as it stands aside the Swiss Franc. This week, US economic data did little to support our standing in the world to attract foreign holdings amidst unrest. Consumer confidence, durable good orders, and housing all came below expectations. This moment supports the reasoning behind the world's lost hope in the reserve currency.

The US Dollar/Oil spread widened throughout the protests. Oil hit $100, only to slide back a bit, but remains flirtatious in a worrying price range. Libya is a main producer and exporter of energy (mainly to southern European countries like Italy). The country has 46 billion barrels of oil reserves; the largest in Africa. Libya also has 55 trillion cubic feet of natural gas, and boasts 1.8 million barrels of oil per day (2010 figures). Despite large oil reserves, production peaked in the late 1960's as natural gas exports grew strong. 45% of Libya's electricity is from natural gas; and the country has enough left over to export. This data shows that Libya's energy is sustainable for domestic consumption and exports to support itself. However, the dictator calls the shots - the resource wealth is essentially in the hands of Gadhafi - and energy plants have decreased production throughout the political unrest.

It's important to realize that the world does not circulate around Libya. Certainly it's butterfly effect has gone rampant, but the supply chain can adjust. Mathematically, the theory shows chaos in steps - starting from a simple move creating waves of response that bring about bangs of opportunity. Opportunity because these new events become the nucleus of a new orbit, given leverage to other spirals of wings. Good only comes from bad. Thus, Saudi Arabia, a key link the region's energy supply chain, pledged its support to fill exports of gas to southern Europe and the rest of world. OPEC nations are surely strengthening their models, and southern European nations like Italy are tapping into their own rainy day reserves of energy. This is not the end all, it's just the beginning..hopefully a realization about dependency.

Meanwhile, Libya's energy conditions are much like the US. Having large oil reserves, and natural gas productivity, the US sits on a wealth of energy resources put aside for the sake of strengthening foreign relations. Libya has a greater energy export economy, but holds a lot of energy in reserve to cater to the gas demands of its neighbors (most pipelines carry natural gas in the region). The US and Canada have a productive partnership in the same industry. We need to realize the butterfly of Libya, and strengthen our energy markets at home. It's enough of a blow that our reserve currency was put to shame by the Swiss Franc. The US Dollar is under the command of oil, when it has the clear opportunity to break away from the fray.