Why Are The Markets Worried About Libya?

It's a fair question. At first glance, while the situation there looks pretty bad for at least two groups of people in the nation[1], there doesn't seem to be a huge reason for the international markets to panic about what is happening there. They didn't flip out about Yemen, after all.

I won't pretend to be an expert in geopolitics and how they apply to the economy, so I won't pretend to give you an exhaustive list of everything everyone is concerned about, but here things to consider in no particular order:

First, Libya (technically the Socialist People's Libyan Arab Jamhiriya) is a member of OPEC. Nobody in the markets wants to see OPEC get riled up, because oil prices tend to rise when that happens.

Second, Libya is a member of OPEC[2]. OPEC controls something like 79.6% of the world's proven oil reserves. Libya, all by itself, holds 4.4% of OPEC's oil reserves, which works out to about 3.5% of the world's oil. That's roughly 46.42 billion barrels, as of the end of 2009. Even if the markets weren't concerned about OPEC as an organization getting riled up about the excitement in Libya, that's still an enormous amount of oil to be left untouched thanks to a violent civil war.

Third, Libya is a state that has historically suported terrorists and possesses what we euphemistically refer to as 'weapons of mass destruction". If "Brother Leader and Guide of the Revolution" Quadhafi finds himself out of power, the worst case could be Werwolf-style guerilla activity in the nation for years to come and/or a massive retaliatory use of chemical weapons[3].

Fourth, Libya has spent the last decade giving financial assistance to poorer African nations and participating in the African Union, so they have a lot of friends on the continent. The nation has actually played a vital role in arranging humanitarian assistance to refugees and in negotiating an end to various local conflicts (such as the genocidal conflict in Darfur). If the Libyan government were to collapse, it could actually destabilize international politics in northern Africa, if not throughout the entire continent.

Fifth, there's always the standard set of concerns. Civil war in Libya could conceivably spill out of Libya's borders, transforming into a larger regional and/or making the Mediterranean dangerous to navigate. Peace is almost always more profitable for business, unless you manufacture weapons.

{1] Those groups are 1) the ruling government and 2) the people rising in rebellion.

[2] This is not just a reiteration of the first point. Work with me, here.

[3] That's worst case, of course. But the markets like looking at the worst case.