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Libya: Why the oil market is nervous

Libya: Why the oil market is nervous thumbnail

Libya is the first oil exporting nation to be engulfed in the political upheaval spreading across North Africa and the Middle East, and investors are worried that further chaos in the region will drive crude prices even higher.

U.S. oil prices surged 6% Monday following violent protests in Tripoli, Libya’s capital, that claimed an estimated 200 lives over the weekend. The unrest is part of a wave of antigovernment protests that started in Tunisia earlier this year and spread to Egypt and other nations in the region.

Libya produced about 1.65 million barrels per day of crude oil in 2010, making it Africa’s third-largest crude producer, according to the U.S. Energy Information Administration. It also supplies several hundred thousand barrels per day of natural gas and other liquid petroleum products.

In addition, the nation sits atop large reserves of oil and gas that have yet to be developed. Libya holds around 44 billion barrels of oil reserves — the largest in Africa — according to Oil and Gas Journal, an industry publication.

U.N. sanctions in place since 1992 had prevented most Western oil firms from operating in Libya after agents from the country’s intelligence service were implicated in the 1988 bombing of Pan Am flight 103, which killed 270. The sanctions have left most of the country’s natural gas reserves, along with a lot of its oil, fairly undeveloped.

The sanctions were lifted in 2004, after Libya said it was disbanding its nuclear program and finished cooperating in the Pam Am case. In 2006, the United States officially took Libya off its list of states that sponsor terrorism. That opened the door for renewed investment in the oil and gas sector.

While it only contributes 2% of world oil production, the spike in oil prices Monday reflects concerns that the crisis in Libya could spread to other major oil exporting nations, said Ann Wyman, head of Middle East and North Africa research at Nomura Securities.

“The markets are responding to the uncertainty of how far this political unrest could spread, and whether other producing countries could be implicated,” she said.

In particular, she said traders are watching the situation in Bahrain, where antigovernment protests could “spill over” into Eastern Saudi Arabia.

While a complete shut down of production in Libya is unlikely, Wyman warned that the situation there remains highly uncertain and could become even more unstable if the nation’s leader, Moammar Gadhafi, is deposed.

“This is a concern that the markets will continue to grapple with,” she said.

But others suggest the spike in oil prices may be overdone.

Unrest in the Middle East and North Africa: Country by country

“Although Libya is an OPEC member, it is still a relatively small player,” said Julian Jessop, an economist at Capital Economics. Libya, he added, ranks ninth on the list of output among the 12 members of the Organization of Petroleum Exporting Countries.

“In principle, any shortfall on global markets could easily be offset by an increase in output from Saudi Arabia,” he said, adding that the OPEC leader is currently producing 3 million barrels per day less than its estimated capacity.

Jessop said the rise in oil prices since last summer has been driven largely by increasing global demand, rather than political tensions or potential supply problems.

U.S. oil prices don’t matter at the pump

He did acknowledge that higher oil prices could further strain some struggling European economies, “but for the global economy as a whole it is just about manageable.”


2 Comments on "Libya: Why the oil market is nervous"

  1. Anthony Peterson on Tue, 22nd Feb 2011 5:05 am 

    “While it only contributes 2% of world oil production” ONLY 2%? If Libya stops exporting oil the price will skyrocket. Back in the early 2000’s a 5% shortfall of natural gas in California caused the price to go up 400%. The world is already sucking up all oil on the market and a 2% instant drop in supply will not be pleasant.

    As every other oil producing nation is already producing as much as they an, weather they say they are or are not. Thats the reality.

  2. jimbo on Tue, 22nd Feb 2011 3:22 pm 

    Agreed Anthony. Also when prices shot up to $147/barrel in July 2008, production hardly increased to take advantage of the high prices.

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