June 26 (Bloomberg) -- Libya, the holder of Africa's largest oil reserves, threatened to cut oil output in response to a U.S. law that allows terror victims to seize assets of foreign governments as compensation.

Congress passed a law in January that would let families of American victims of Libyan-linked attacks confiscate Libyan assets and those of companies doing business with the North African nation. At least two lawsuits have already been filed in Washington.

``We hope that we reach a solution that at least respects the sovereignty of the different countries,'' and excludes ``this threat of force,'' Shokri Ghanem, the chairman of Libya's National Oil Corp, said in a telephone interview with Bloomberg television from Cairo.

Ghanem served as Prime Minister from 2003 to 2006, when the U.S. began easing two decades of sanctions, including the removal of Libya from a U.S. list of nations that sponsor terrorism.

Oil futures rose as much as $4.40 a barrel, or 3.3 percent, to $138.95 a barrel in New York. An output cut from Libya or any other member of the Organization of Petroleum Exporting Countries, would counter planned supply increases from Saudi Arabia, OPEC's biggest producer.

Crude prices, which reached a record $139.89 on June 16, have almost doubled from a year ago. Ghanem also cited an ``oversupplied'' oil market as a reason for considering cutting output.

$150 Oil

``With or without cutting, the price of oil is going to go up because of fear of uncertainty; $150 a barrel is just around the corner,'' he said. Ghanem said he ``wouldn't be surprised'' if oil reached $200 a barrel by the end of the year, on the back of Middle East political tensions such as threats against Iran, and a lack of capacity in the global oil refining industry.

Libya's oil industry was hurt by U.S. and international trade and diplomatic sanctions imposed between 1986 and 2004. They were lifted after Colonel Muammar al-Qaddafi, Libya's ruler since 1969, pledged to give up terrorism, to pay compensation for the families of 270 people killed in the 1988 bombing of a PanAm jet over Lockerbie, Scotland, and abandon efforts to acquire weapons of mass destruction.

Libya is holding out on the final payment to the Lockerbie victims' families and backtracked on a settlement that would have compensated U.S. victims of the 1986 bombing of a disco in Berlin. Libya alleged the U.S. hadn't followed through on all of its commitments.

Collecting Damages

The law Congress passed in January allows assets to be frozen during the course of a U.S. court case and for those securities to be seized in the event of a judgment against the country in question. The law is intended to help victims of terrorist acts sponsored by states enforce court judgments in their favor and collect the damages awarded.

At least two lawsuits were filed in March in U.S. District Court in Washington, D.C., seeking damages for alleged Libya- sponsored terrorism, according to court records compiled by Bloomberg News.

In one, relatives of victims in the Dec. 27, 1985 attack at Leonardo da Vinci Airport in Rome and a simultaneous attack at Vienna's airport sued Libya and Syria for supporting and funding the terrorism. In the other lawsuit, Libya and Syria were sued by the families of American victims of the Nov. 23, 1985 hijacking of Egypt Air Flight 648, which took off from Athens and was forced down in Malta. In a rescue attempt, 60 people died, according to an Associated Press report. The suits seek damages of $1 billion per victim.

Saudi Decision

Libya was against Saudi Arabia's decision to increase output, announced in the run-up to a summit between oil producers and consumers in Jeddah on June 22. The kingdom, the world's largest oil exporter, had called for the meeting to discuss ways of restraining prices, amid calls from the U.S. the European Union to increase supply.

``If they want the production capacity of OPEC to increase, they should facilitate foreign investments, not threaten with freezing their assets in the U.S,'' Ghanem said today. ``The Jeddah meeting didn't have any impact.''

The Energy Department said yesterday U.S. inventories gained 803,000 barrels to 301.8 million last week. A 1.1 million-barrel drop was forecast by analysts in a Bloomberg News survey.

Libya ranks third in terms of oil production in Africa, behind Angola and Nigeria. It produced at a rate of 1.7 million barrels a day in May, according to Bloomberg estimates.

To contact the reporter on this story: Maher Chmaytelli in Nicosia at o mchmaytelli@bloomberg.net

Last Updated: June 26, 2008 13:48 EDT