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Oil Prices Rise On Libya Crisis

  • Charles Recknagel

The price of oil has shot up with the crisis in Libya, even though currently the country is exporting oil as usual.

The price of benchmark Brent crude-oil futures hovered around $107 a barrel today. That is just slightly short of the 2 1/2-year high of $108 a barrel it hit on February 21 as the Libyan crisis broke out.

Similarly, U.S. crude futures rose $0.51 to $95.93 a barrel this week, the highest level since October 2008.

Analysts say the price of oil is climbing as traders scramble to buy up future supplies amid fears that Libya's unrest could bring the country's exports to a halt.

"Libya produces something like 1.6 million barrels per day at the moment and they are looking to expand, and a number of Western companies have got contracts there to explore and to develop further production," says David Knott of the Cyprus-based oil-trade journal Middle East Economic Survey.

"The majority of [Libya's] oil is exported, so if Libyan production ground to a halt then there would be a noticeable impact on actual oil supplies to the market."

'Knock-On' Effects

But there are also concerns that the unrest in Libya could grow so bad that it would disrupt the country's ability to export oil not just in the short term but far into the future.

"I think for the oil market, the longer-term concern and what is particularly impacting the oil price is that potential removal of a certain amount of the Libyan capacity but, also, what could be the knock-on effects of the crisis in Libya," Knott says.

"I mean, economically, for Libya it could be a very uncertain future. There is the prospect of potential civil war or fairly rapid disintegration of the Libyan economy."

Such fears are fueled by the way the Libyan crisis has escalated from isolated street protests last week into massive unrest in just a few days.

Libyan leader Muammar Qaddafi has not just used aircraft and helicopters to fire on protesters, but also urged his supporters to attack protesters' home bases and "secure the country."

His calls, which raise the specter of ever-wider civil conflict, come amid reports that protesters have taken control of several key cities in the country, including Benghazi, Sirte, and Tobruk. Ninety percent of Libyan oil exports come from the eastern region of Cyrenaica, epicenter of the revolt against Qaddafi.

OPEC Steps In

As prices rise, the Organization of the Petroleum Exporting Countries (OPEC) has sought to assure the market that it's ready and able to make up any Libyan shortfalls.

The 12-country oil cartel can increase production by utilizing some oil fields, particularly in Saudi Arabia, which currently do not run at full capacity or are now shut down.

OPEC groups Libya with such major oil producers as Saudi Arabia and Iran, and the cartel's members collectively hold 79 percent of world's crude-oil reserves and 44 percent of the world’s crude-oil production.

But whether oil prices would actually come down again in response to OPEC using its spare capacity to make up for any Libyan shortfall is anybody's guess.

Knott says that if Libya goes off-line and OPEC steps in, oil prices might still remain high on multiple fears. Those would include concerns that the street unrest now rocking the Arab world could yet spread further to outstrip even OPEC's spare capacity to make up for production losses.

So far, the unrest has yet to show signs of spreading to OPEC's main producers in the Persian Gulf region. But the oil market, which buys up oil months before it is actually pumped from the ground, operates according to best guesses of what the future will bring, and the mood in the market now is distinctly nervous.

In just one measure of just how on edge the Middle East has grown since the first unrest broke out in Tunisia in January, Saudi Arabia's King Abdullah today announced he would add $ 10.7 billion to a development fund that helps ordinary Saudis buy homes, get married, and start businesses.

He made the announcement as he returned home today following several months abroad for medical treatment.

Away From The Middle East

As the oil market watches events in the Middle East with ever more uncertainty, the rising oil prices are being welcomed by oil-exporting countries in other parts of the world.

Russian Finance Minister Aleksei Kudrin said earlier this week that if prices stayed at about $100 per barrel, his country could achieve a balanced budget by 2014.

"I think we will have no deficit by 2015," he told Rossia-24 TV on Monday. "It may happen earlier, if [oil] prices stay at about $100, then it may happen in 2014." Oil is Russia's key export.

Other oil-producing countries could benefit similarly, including those in the Caspian Basin. Analysts say that the longer the unrest in the Middle East continues and oil prices remain high, the more incentive there will be for investors to put money into regions that promise steady supplies.

And today, as far as many investors are concerned, the farther those new regions are from the Middle East, the better.