West Texas Intermediate reached the magic $100 a barrel mark today and then backed off a bit while Brent Crude rose to over $110 a barrel.
All because of unrest in Libya which produces a measly 1.6 million barrels a day. Tom Whipple:
It has taken two months for the contagion that began with the immolation of a fruit seller in Tunisia to reach the first significant oil producing nation.
As oil production in Libya grinds to a halt and Muammar Gadhafi clings to power amidst increasing turmoil, it is beginning to look as if it may be sometime before Tripoli resumes its normal oil exports. While the 1.6 million barrels a day (b/d) that the Libyans pumped in January may not appear significant in a world that produces some 88 million barrels each day, we should remember that those barrels are being consumed somewhere in a world where they are consumed just as fast as they are produced. If there is anything that we have learned in the last 40 years, it is that relatively small disruptions in oil production can lead to relatively large increases in oil prices.
There is no extra oil. The Saudis say they can make up the difference but for how long? Libya is different and as Gail Tverberg explains this may not be a short term event.
Another issue is that Libya is an oil exporter, and news sources are reporting that oil companies are closing up operations and trying to move employees out of the country. To make matters worse, the above-linked article also reports:
Meanwhile, local tribes in the North African country on Monday took control of the headquarters of an oil company in Ubari city in southwestern Libya.
So the problem is worse than just the oil companies leaving. There is also the threat (and reality) of dissident groups taking over oil company operations. There are reports of protesters setting fire to government buildings in Libya. It is all too easy to imagine protesters setting fire to oil infrastructure as well.
With a weak governmental tradition, appart from the dictator in charge, one concern is that the country will dissolve into civil war, which will ultimately break up the country. Libya’s historical leadership has come from a network of tribes, and it is possible that the country will break into pieces, reflecting tribal alliances. Such an environment could be a poor one for oil companies, especially if protestors have set fire to important oil infrastructure.
And who will be next? While Saudi Arabia is unlikely to fall soon that doesn’t eliminate the possibility of oil infrastructure sabotage in the areas with a Shia majority.
So what’s next? Tom Whipple:
Add the loss of all or a major portion of Libyan oil production for an unknown period and the likely more-than-forecasted increase in Chinese demand, to the possibility that the Saudis will never produce much more than 10 million b/d, and the world is in for some real problems. To avoid shortages, the price of oil will be moving significantly higher. This week we have already seen oil trade in London at $108 a barrel and analysts are already talking about oil moving beyond the $147 all-time nominal peak set three years ago – a notion that was widely rejected four weeks ago. Should oil get back in the vicinity of $150 or beyond later this year, recent history tells us that a violent reaction is likely to set in. Given the fragility of the US and other OECD economies, the demand for oil is likely to drop sharply and with it will fall much economic activity fostered by people moving around in cars and planes or spending discretionary money.
The question of the day, however, is whether or not the current political upheavals will come to be recognized as a major turning point in the history of the oil age. There is no question that the loss of Libyan production, if prolonged, will accelerate the day when global oil production begins its final decline towards the end of the oil age.
However, the optimistic case holds that any outage of Libyan production will be of short duration and the upheavals will not spread to other oil exporting countries. If this should be true much higher oil prices could be delayed for a year or two. The pessimistic case says that the Libyan outage will continue for a while; will not be replaced by a rapid increase in Saudi exports; additional shortages will develop if other oil exporters have significant domestic problems: and the current price increases continue steadily until the global economy falters. If this should occur the Tunisian contagion really was an inflection point in world history.
An infected ingrown toenail can be fatal – is that what Tunisia will turn out to be? As we have pointed out before at some point between $100 and $110 a barrel oil becomes too expensive for economic growth. No economic growth and unrest will spread from the Middle East to Europe and yes, even America.
Cross posted at Newshoggers.