Libyan strife threatens to rattle oil supply

Is another oil shock just at the corner? Nobody can rule it out.

Not since Iraq invaded Kuwait in 1990 has an emerging crisis of crude loomed so large.
Oil futures in New York jumped nearly $12 last week to settle above at $98 a barrel, their highest since October 2008. And in London, benchmark Brent crude traded close to $115 a barrel.

The events unfolding in the Arab world, the epicenter of global oil production, are a sobering reminder that trading in oil is at the heart of a political game.

As rebels tightened their noose around Tripoli, Libya, 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 oil workers too afraid to go to work. And with most foreign workers having fled the strife-torn country and armed men beginning to loot equipment left behind, a return to normal crude production appears weeks, if not months, away.

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 the customers on edge — is the possibility that the uprisings in the Arab world might spread to other OPEC nations in the Middle East.

Few oil experts are surprised that the unrest in the Middle East and North Africa 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.

The question on everyone's mind is what if this goes beyond Libya. Further unrest — or simply fear of further unrest — could well drive oil prices higher.

The price of oil had been rising steadily even before the wave of 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 2 percent in 2011.

Now economists worry that high and rising energy prices could hurt the global economy just as it is beginning to revive in the Western countries.

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 a tailspin.

The biggest shock followed the 1973-74 OPEC oil embargo, which quadrupled oil prices and helped produce stagflation, a period of slow growth, high unemployment and inflation.

To calm markets, Saudi Arabia has started to increase its crude output to more
than 9 million barrels a day, roughly 700,000 barrels more than at the end of 2010.

People's Daily Online