This is no oil shock — not yet, anyway.
But the events unfolding in the Arab world, the epicentre of global oil production, are a sobering reminder that trading in oil, that mother of all commodities, is at heart a political game. Not since Iraq invaded Kuwait in 1990 have the politics of crude loomed so large. Like much of the Arab world, this market seems like a pocket full of firecrackers, just waiting for a match.
As rebels tightened their noose around Tripoli on February 27, its critical oil supplies remained constricted. Production from most of Libya's oil fields was down to a trickle.
Several ports and refineries were left stricken by workers too afraid to go to work. And with most foreign oil company employees having left the country and armed men beginning to loot equipment left behind, a return to normal production appears weeks away at best.
Facilities are now in rebel areas
About 80 per cent of the nation's oil production lies in rebel-held territory, though there is not a way to verify how much rebel leaders directly control.
Granted, the world can cope with a disruption of exports from Libya. But what has brought us to $100-a-barrel oil again — and set people on edge — is the possibility that the uprisings that toppled autocrats in Egypt and Tunisia might spread to other Organisation of the Petroleum Exporting Countries (OPEC) nations in the Middle East.
For the moment, heavyweights like Saudi Arabia can make up the difference, and big consumers, like the United States, have stored millions of barrels of oil for just this kind of emergency.
But few oil experts are surprised that the unrest has so unnerved the market. The world is thirsty for oil, and supply and demand are in delicate balance. There is little room for more disruptions in supplies. Indeed, spare capacity — essentially that amount of extra oil that OPEC members are able to produce in a pinch — is now about five million barrels a day. That is about six per cent of the oil that the world consumes every day. That cushion is greater than in 2008, when it equalled about two per cent of daily consumption, but it remains worryingly thin. And that is not even taking into account the loss of about one million barrels a day exported from Libya.
“There is a vulnerability to tightness,” said David Knapp, senior energy economist at Energy Intelligence, a specialised publisher. “But for now, there are enough barrels out there in commercial storage and OPEC's spare capacity and strategic reserves held by industrial countries to handle a medium-duration outage from Libya.”
The question on everyone's mind is what if this goes beyond Libya. Costanza Jacazio, an energy analyst at Barclays Capital in New York, says further unrest — or simply fear of further unrest — could well drive oil prices higher. “The degree of geopolitical risk now is massive.”
Jan Stuart, an energy economist at Macquarie Securities, explained: “This brings back the political dimension to oil-price dynamics. For the best part of the past 25 years, the Saudis have bent backwards to make sure politics would be banned from discussions about oil supplies. The risk today is we could go back the other way again.”
The price of oil had been rising steadily even before the wave of pro-democracy protests swept much of the Middle East and North Africa. A recovering global economy had convinced traders that demand for oil was going to rise by about two per cent in 2011. Some industry experts and Wall Street seers were predicting a gradual march back to $120 and even $150. The thinking was that investors would pour money into the commodity markets.
Oil futures in New York jumped nearly $12 last week to settle at $97.88 a barrel, their highest since October 2008; in London, benchmark Brent crude traded close to $115 a barrel.
Now economists worry that high and rising energy prices could hurt the economy just as it is beginning to revive. The price of gasoline averaged $3.29 a gallon on February 25, up from $3.11 a month ago. As a rule, every one-cent increase takes more than $1 billion out of consumers' pockets a year.
If prices keep climbing, consumers will in all likelihood tighten their belts. If prices stay high for long, the impact could be severe: every oil shock of the past 40 years has helped push the global economy into recession. Nariman Behravesh, senior economist at IHS Global Insight, said that every $10 increase in the price of a barrel of oil reduces economic growth by two-tenths of a percentage point after one year and a full percentage point over two years.
In some ways, something like this was bound to happen. This is not a “black swan” event — a sudden, unexpected occurrence — but a white swan one, said Michael A. Levi, senior fellow for energy and the environment at the Council on Foreign Relations.
“You can't predict what the specific disruption there will be, but you can be sure there will be some disruption,” he said.
Saudi Arabia's reaction
To calm markets, Saudi Arabia has started to increase its crude output to more than nine million barrels a day, roughly 7,00,000 barrels more than at the end of 2010, Energy Intelligence reported. Saudi officials are also asking European refiners, who are most directly affected by the drop in Libyan exports, how much and what grades of crude they need for quick shipment.
And the International Energy Agency, an organisation of consuming countries, also helped defuse tensions in the markets when it said on February 24 that the world had “the tools at hand to deliver adequate oil to the market,” including the availability of emergency stocks held by consuming nations.
Much now hinges on what happens next in the Middle East. The price spikes that accompanied the two Persian Gulf wars did not have deep impacts because they did not last long enough. But several oil price increases have preceded economic downturns.
The biggest shock followed the 1973-74 OPEC embargo, which quadrupled oil prices and helped produce stagflation, a period of slow growth, high unemployment and inflation.
The 1979 Iranian revolution caused another shortage, and again American motorists were forced to wait in long lines for gasoline. Oil prices surged, but they did not stay elevated for long, as Mexico, Nigeria and Venezuela expanded production and OPEC lost its unity. Oil prices remained low for years, and the economy through the later half of the 1980s and most of the 1990s was generally strong.
If the current unrest helps drive the price of a barrel up by $40 to $50, back to its level of three years ago, that would really hurt.
“If gasoline prices go over $4 a gallon, there could be a big psychological effect,” Mr. Behravesh said, “but it would have to last.”— © New York Times News Service