Libya sends shivers through oil market

However, impact likely to be small, as analysts doubt Libyan-style anarchy will spread to other petroleum exporters.

By DAVID ROSENBERG / THE MEDIA LINE
February 23, 2011 18:57
oil barrel 88

oil barrel 88. (photo credit: )

 
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Turmoil in Libya has put the global oil market into a tizzy this week, with Muammar Gaddafi and tribal leaders both threatening to blow up pipelines and foreign oil workers fleeing the country.

But many analysts said Libya by itself can’t strangle the global supply and that the chaos that has gripped the country is unlikely to be repeated anywhere else in the Middle East, which accounts more than one-third of the world’s oil reserves.

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“The direct impact of what is happening in Libya is pretty small, even though Libya is an oil exporter,” Julian Jessop, chief international economist, Capital Economics in London, told The Media Line. He said he was skeptical unrest would spread to other oil exporters. “The most dangerous domino has already fallen, which is Libya.”

Oil prices have been climbing as unrest flares up in one Middle Eastern country after another. But until they reached Libya a week ago, the mass protests had been confined to the region’s oil-poor nations – Tunisia, Egypt, Yemen and Bahrain.  On Tuesday, the price of Brent crude – a benchmark for petroleum prices – reached $108.57 a barrel, its highest in two years. On Wednesday, it pulled back slightly but remained above $107.

Libya accounts for just 2.3% of global oil production, or about 1.6 million barrels a day, which makes it the second-smallest producer in the Middle East. But events in Libya have served to sow panic in global markets. Time magazine reported that Gaddafi ordered his security forces to sabotage oil facilities. Earlier in the week unnamed tribal leaders who have joined the anti- Gaddafi opposition vowed to do the same thing.

Meanwhile, the foreign companies that operate Libya’s oil fields – including Eni of Italy, the largest foreign oil company in Libya, and Wintershall, a subsidiary of Germany’s BASF  – have instructed their employees to leave. Reuters reported on Wednesday that Libya had declared force majeure on all oil exports, allowing producers to miss contractual obligations without financial penalty. By most estimates, Libyan production has been cut by about a fifth, or 300,000 barrels per day.



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Analysts have warned that Libya could be in a for a long stretch of unrest, as both Gaddafi and the opposition have signaled their determination not to pull back from conflict as has happened elsewhere in the region. But even a prolonged conflict leading to a shutdown of Libyan production could be absorbed by the world petroleum market.

Tom Kloza, the chief oil analyst at the Oil Price Information Service, told The New York Times that the Saudis could ramp up their production as much as 1.5 million barrels in days. The Organization of the Petroleum Exporting Countries (OPEC) has excess capacity of up to five million barrels, which could be on-line within several weeks.

Saudi Arabia's oil minister, Ali Al-Naimi, said on Tuesday that his country alone has a surplus of about four million barrels per day, the Saudi Press Agency reported.

The Saudis have every interest in ensuring a sure and steady supply of oil to the West, said Jessup, who estimated that the panic sparked by Libya had added about $10 a barrel to the price of oil.” The last thing Saudi Arabia wants to do is make the West any more concerned about dependency on Middle East oil,” he said.

Among major oil producers, aside from Libya the only one to have been hit by unrest is neighboring Algeria. But Mohammed El-Katiri, North Africa analyst for the Eurasia Group, said he was optimistic that Algeria would not follow the same chaotic trajectory as Libya.

Strikes hampered business in Algeria on Tuesday, following short-lived anti-government protests on Saturday and Monday in the capital Algiers. In a bid to head-off further unrest, Algeria’s cabinet moved to lift a 19-year-old state of emergency.

Algeria went through a prolonged period of unrest in the 1990s when the government and Islamists fought each other, but the country never ceased production of oil and gas. Unlike Libya, which Gaddafi has run as a one-man show, Algeria has a strong army and other institutions that would be better able to preserve order in the case of unrest.

“I don’t think the Algerian military or politicians would ever make a threat to burn oil,” El-Katiri told The Media Line. “It’s a different mentality. And, the oil and gas infrastructure in Algeria has its own private security.”

Algeria produces about 1.4 million barrels of oil daily, or about 1.7% of world production. But it is one of the Middle East’s biggest producers of natural gas, at about 81 billion cubic meters annually.

At the other end of the Middle East, Bahrain has been wracked by protests by its disenfranchised Shiite majority. On Tuesday, more than 100,000 protesters packed Pearl Square in the largest democracy rally since the start of the unrest. Bahrain produces tiny amounts of oil, but its neighbors  –  Saudi Arabia, Kuwait, the United Arab Emirates and Qatar – are all major energy exporters and have escaped turmoil.

Theodore Karasik, director for research and development for the Institute for Near East and Gulf Military Analysis, told The Media Line, citing the country’s Sunni-Shiite divide, that Saudi Arabia, with its own Shiite minority, could become “problematic” but that the government has the will and resources to address it.

“At this time, Bahrain is the exceptional case,” Karasik told The Media Line.
Nevertheless, Barclays Capital in a report this week warned that Middle East turmoil could cause "lasting unease in the oil markets" and push crude prices to $135 barrel. Although there is little danger of any country ceasing production altogether, unrest threatens to deter exploration and investment, said Helima Croft, Barclays senior geopolitical strategist.


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