Information has surfaced that forces opposing Libyan leader Moammar Gadhafi secured the major oil towns of Brega and Ras Lanuf (both port cities on the Mediterranean).
The Libyan rebels now control oil fields producing between 100,000 and 130,000 barrels a day, and they say that will quickly increase to 300,000, with exports renewing in a week. That higher figure would account for about 19% of daily exports from Libya before the unrest started.
To the extent that anti-Gadhafi forces can secure the oil fields presently under their control, at least some of those exports should begin to flow again.
Yet those forces have their primary interest, these days, in driving on to the capital city of Tripoli. Already, they are fighting their way west along the coast and have closed in on Sirte, Gadhafi's hometown, which is within 300 miles of the capital.
That means the actual protection of this oil flow will depend upon the NATO-engineered no-fly zone. The overall strategy on that zone, in turn, depends on what kind of government emerges if Gadhafi is indeed removed from power.
Still, the most pressing question for investors is, will what's happening in Libya improve the crude oil on the market?
The Bottom Line: Libya Doesn't Drive PricesWithout an ongoing Western military presence in Libya, there is no assurance that exports - even if they are renewed - will continue. Additionally, the delivery and export infrastructure needs to be evaluated to determine how extensive the damage has been.
The primary oil-field development projects remain under the control of Western majors, and those companies have yet to return their technicians and specialists to Libya after pulling them out. The central logistical coordination for the Libyan oil sector remains in Tripoli.
With the capital city now certain to be the focus of renewed fighting, there will be few prospects to increase export flow - even if the combination of insurgent military action on the ground and NATO strikes from the air do retain control over reclaimed fields.
Crude oil futures now hold at about $105 in New York and just under $115 in London. Improvements have emerged, but they are quite subdued. A rise in Libyan flow is welcome, but will not change aggregate prices very much.
After all, before the unrest began, Libya was providing only 2% of the daily worldwide crude volume.
And in early January - before the broad-based explosions in the MENA (Middle East and North Africa) region and the disasters in Japan - we were still experiencing the highest crude oil prices on record for that time of year. And I mean the highest prices ever.
Libya is the conflict du jour, the unfolding news that now transfixes the international media. But it is not the primary pressure destined to increase prices.
A resolution of its problems, therefore, will not bring a sudden forward-looking drop of any consequence in either West Texas Intermediate (WTI, the benchmark for NYMEX trading) or Brent (the London-based benchmark, having a more important impact on a broader range of international prices).
What really matters are two overarching dynamics now underway. Those dynamics consist of the fact that:
- MENA unrest is intensifying across the board.
- There are other factors at work in the oil market.
Let's look at each of these in detail.
The Growing MENA MessWhen it comes to the Middle East/North Africa region that analysts have dubbed as "MENA," the events I watch with the greatest concern are those in Bahrain. That's because, in addition to having factors addressing oil and the advancing economic difficulties, Bahrain also has the single greatest volatile factor in the entire region - a Sunni minority ruling class and a Shiite majority population.
This is akin to playing with dynamite in the streets.
It is already a religiously inspired opposition. The fact that they are making their case for more participatory rule right in the middle of the primary source of oil in the world hardly occasions a greater comfort level.
Also, a causeway connects Bahrain to the eastern region of Saudi Arabia, where an absolute majority of that country's oil production is located. That area is also Shiite-dominated, while the ruling family in Riyadh is closer to Sunni (they are actually Wahabi, but very opposed to Shia).
When the 1979 Shiite revolution erupted just across the Gulf, in Iran, the eastern province of Saudi Arabia also erupted.
Little wonder, then, that this time around Saudi security forces and police are putting down the earliest disturbances in their own territory, while also moving into Bahrain "to keep the peace."
This is the geopolitical dimension taking over in the region.
It is no longer merely about removing a certain ruler (whether it's Gadhafi in Libya, the now-ousted Hosni Mubarak in Egypt, or Zine al-Abidine Ben Ali in Tunisia) or improving the life prospects of a wide portion of populations.
For the world to have confidence in the oil flow continuing, stability is required.
Yet the region now faces its biggest internal threat to stability -- a renewing collision based on the successors of Muhammad.
And that had been going on for some 1,300 years.
The "Other Factors" Impact
The volume coming on market is guaranteeing an increase in prices for both the crude oil itself, and for the oil products produced from that crude.
We do not yet have a situation in which the availability of supply is an issue. We do have sufficient oil out there - but it is costing more to extract, process, and refine. Unconventional sources - such as heavy oil, bitumen, oil sands, or oil shale - will fulfill needs for some time to come, but the price will be rising, right along with the need to use sources that are more expensive.
At some point, of course, the overall cost will begin to have a significant impact on wider economic considerations. Not simply at the pump, in terms of the price of gasoline or diesel, but throughout the market, as increasing prices for consumer, commercial, and industrial usage begin taking their toll.
Libya is one of the last places on Earth that provides light, sweet crude - the volume that is easiest and least expensive to process.
Unfortunately, even if all of that supply returns to market, we will still be relying increasingly on more costly production.
NATO's actions may bring the Libyan oil flow back, but it cannot stem an even greater tidal wave of demand from regions worldwide.
Nor, for that matter, will no-fly zones provide any benefit in allaying the rising base of religiously driven unrest about to race across the very area we rely upon to develop the bulk of the globe's oil reserves.
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