Revolutionary scenarios affect global oil prices
Shawkat Hammoudeh
Issue date: 3/11/11 Section: Ed-Op
Libya, which is located in North Africa and next door to revolutionary Tunisia, produces 1.6 million barrels of oil a day. Libya's oil production is about 2 percent of global oil production. Algeria, which is also located in North Africa and geographically very close to Libya, produces 1.9 MBD. Both countries produce high quality oil (i.e., light and sweet), which produces a relatively high proportion of gasoline. Saudi Arabia produces 10 percent of global oil production, possesses four MBD spare capacity and has the highest oil reserves in the world. Almost all Saudi Arabia is medium light and heavy and is not a perfect substitute for Libyan oil. It needs refineries with certain specifications to refine its oil.
Libya is being swept by a revolution that came from Tunisia to the west and Egypt to the east. The Libyan revolution has sent the American West Texas Intermediate to more than $100 a barrel and the North Sea Brent to more than $115 a barrel in just few days. Brent is the benchmark for oil in Europe, Middle East, non-Middle East Asia and Africa. Brent has felt the Arab revolutions more considerably than WTI through the fear of risk premium, which is one of the four major components of the oil price.
Having said all the above, no one knows for sure how high the oil price will reach before enough is enough. No one has one number or one sentence that can accurately pinpoint the level the oil price will reach before it turns down in the other direction. But I can envision three scenarios and one of them is likely to happen.
Scenario 1: The Libyan revolution will spread to Algeria and the global oil market will experience a supply disruption amounting to about 3.5 MBD, which, if this happens, would wipe out the Saudi spare production capacity and expose the world oil market to influential marginal events. If this scenario materializes, oil price will jump to $150 a barrel or more in a short period of time. Saudi oil can substitute a disruption of Libyan and Algerian oil. But how likely will this scenario take place? If you ask the Algerians about a revolution contagion spreading from Libya to Algeria, they will say that they had their revolution 10 years ago and paid dearly for it and the world did not care. Moreover, the Algerian government has been on the lookout and learned from the Tunisian and Egyptian revolutions. It has introduced enough reforms that should have blunted the revolution contagion. In my opinion, this scenario has a very low probability to happen, and I can dare to dismiss it.
Libya is being swept by a revolution that came from Tunisia to the west and Egypt to the east. The Libyan revolution has sent the American West Texas Intermediate to more than $100 a barrel and the North Sea Brent to more than $115 a barrel in just few days. Brent is the benchmark for oil in Europe, Middle East, non-Middle East Asia and Africa. Brent has felt the Arab revolutions more considerably than WTI through the fear of risk premium, which is one of the four major components of the oil price.
Having said all the above, no one knows for sure how high the oil price will reach before enough is enough. No one has one number or one sentence that can accurately pinpoint the level the oil price will reach before it turns down in the other direction. But I can envision three scenarios and one of them is likely to happen.
Scenario 1: The Libyan revolution will spread to Algeria and the global oil market will experience a supply disruption amounting to about 3.5 MBD, which, if this happens, would wipe out the Saudi spare production capacity and expose the world oil market to influential marginal events. If this scenario materializes, oil price will jump to $150 a barrel or more in a short period of time. Saudi oil can substitute a disruption of Libyan and Algerian oil. But how likely will this scenario take place? If you ask the Algerians about a revolution contagion spreading from Libya to Algeria, they will say that they had their revolution 10 years ago and paid dearly for it and the world did not care. Moreover, the Algerian government has been on the lookout and learned from the Tunisian and Egyptian revolutions. It has introduced enough reforms that should have blunted the revolution contagion. In my opinion, this scenario has a very low probability to happen, and I can dare to dismiss it.
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