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Just a couple of months into 2011 we have already seen two chaotic anti-government protests in Egypt and Tunisia.

But was this just the tip of the iceberg?

In late January 2011, we saw Tunisia’s former President Ben Ali flee to Saudi Arabia after days of violent anti-government protests.

Then, in February, we witnessed how people power forced Egypt’s former President Hosni Mubarak to end his decades-long rule.

And now, the Middle East and North African (MENA) nations including Libya, Yemen, Algeria, and Saudi Arabia are hitting the airwaves with their own demonstrations, putting world markets on a tailspin.

Trouble in Libya began brewing around mid-February when protesters in Benghazi, the country’s second-largest city, were handled violently by police.

Other demonstrators soon joined all the hatin’, and the Libyan government literally fired back and shot unarmed civilians.

Today, violence and outrage continue to dominate the country with Seif al-Islam Qadhafi, son of Muammar al-Gaddafi, recently swearing to fight until the “last man, last woman, last bullet.” Talk about conviction!

Unfortunately, this appears to have taken its toll on Libya’s oil production. Market geeks say that production has already dropped by at least 100,000 barrels per day. The news is giving investors sleepless nights because Libya has the largest oil reserves in Africa. Yipes!

Aside from Libya, other MENA countries are also revealing their bad vibes towards their government.

For one, Algerians have resumed their pro-democracy protests a few days ago, Iranians have launched anti-government slogans, and small Shi’ite protests were also spotted in the eastern province of Saudi Arabia.

What people have to realize is that much more is a stake now that protests are flaring up in some of the world’s top oil-producing nations. Saudi Arabia is the 2nd largest oil producer in the world, pumping out over 9 million barrels of oil per day.

Meanwhile, Algeria, Iran, and Libya aren’t too far behind in terms of ranking. All three countries are in the top 15 in terms of daily output, producing roughly 2.1M, 1.8M, and 4.2M barrels in one day.

Moreover, these four countries also have some of the largest oil reserves. Data show that all four countries are also in the top 15 in terms of proven crude oil reserves.

Naturally, all these protests are putting pressure on oil prices. After all, if tensions get worse, where will the world’s gas-guzzling economies (*cough* the U.S. and China *cough*) get their “black crack” to satisfy their addiction?

Oil prices had actually been leveling off as the Organization of Petroleum Exporting Countries (OPEC) called for more oil production, while Saudi Arabian officials tried some jawboning of their own. But now that all this political tension has hit markets, it seems that crude oil prices are now on the fast track to hit the psychological $100/barrel mark!

Wait a minute, we trade currencies and not commodities! What do all these have to do with the forex market?

For starters, let’s revisit the School of Pipsology and review the correlation between oil and the Canadian dollar.

Since Canada is one of the top oil producers in the world, rising oil prices would be beneficial for the Canadian economy as well as its currency.

Now if oil production is restricted in the MENA hub, “black crack” addicts might have to turn to Canada to get their fix. That means more brownie points for the Loonie!

But if the supply of oil still runs short, it could wind up hurting production and growth in those economies that rely heavily on oil. In particular, Europe gets a sizeable chunk of its oil needs from Libya.

Without their regular oil fix, Europe’s manufacturing industries would be severely crippled.

In fact, Libya already cut off its natural gas supply to Italy, leaving the country with only 30 days worth of gas reserves and 90 days’ supply of oil. I wonder what would happen once those reserves run out…

Of course, this grim outlook has resulted in widespread risk aversion in the markets. The prospect of another oil crisis, which could push some economies back to recession, led to a huge drop in equities and forced traders to flee to the safe-havens.

It doesn’t help that several political analysts are predicting that this turmoil could spread like wildfire, even to South American nations such as Cuba and Venezuela.

This oil supply issue is definitely heating up and I have a feeling that other conflicts are brewing.