Oil And The Revolt In Libya — What If?

Libya is one of the smaller oil exporters in OPEC. They were producing 1.65 million barrels per day in 2010 (through October) according to EIA data. However, the very serious political upheaval in this North African country poses a genuine threat to that production.

NEW YORK (CNNMoney) -- Libya is the first oil exporting nation to be engulfed in the political upheaval spreading across North Africa and the Middle East, and investors are worried that further chaos in the region will drive crude prices even higher.

U.S. oil prices surged 6% Monday following violent protests in Tripoli, Libya's capital, that claimed an estimated 200 lives over the weekend. The unrest is part of a wave of antigovernment protests that started in Tunisia earlier this year and spread to Egypt and other nations in the region.

Unlike in Egypt, where the revolt seemed almost orderly and never exhibited this level of violence, the situation in Libya could quickly escalate out of control. I take it seriously and suggest you do the same.

Let's look at a worst case scenario in Libya, ignoring for the moment the contagion that might spill over from Bahrain into eastern Saudi Arabia among the Shia' populations there. Let's assume Libya's oil output has been reduced to zero. What would happen? From the CNNMoney article—

"Although Libya is an OPEC member, it is still a relatively small player," said Julian Jessop, an economist at Capital Economics. Libya, he added, ranks ninth on the list of output among the 12 members of the Organization of Petroleum Exporting Countries.

"In principle, any shortfall on global markets could easily be offset by an increase in output from Saudi Arabia," he said, adding that the OPEC leader is currently producing 3 million barrels per day less than its estimated capacity.

Jessop said the rise in oil prices since last summer has been driven largely by increasing global demand, rather than political tensions or potential supply problems.

And from the Wall Street Journal's Libyan Unrest Gets Oil Market's Attention—

World oil markets have sufficient stocks and spare capacity to absorb even a full loss of Libyan output. The country's oil production of 1.58 million barrels per day in January makes it the seventh-largest producer in the Organization of Petroleum Exporting Countries, but Saudi Arabia alone had 3.5 million barrels per day of spare capacity last month; any Libyan shortfalls could be comfortably covered. So far, the International Energy Agency reports output of only 50,000 barrels of oil per day has been suspended in Libya.

So there's your standard answer: the world's swing producer Saudi Arabia will seamlessly replace lost oil from Libya. According to the JODI data, Saudi Arabia produced 8.37 million barrels per day in December, 2010.

(Bloomberg, February 19, 2011) -- Saudi Arabia’s exports fell to 6.05 million barrels a day in December from 6.36 million in November even as Saudi production rose to a two-year high of 8.37 million barrels a day, JODI said.

“This is a huge difference,” said John Sfakianakis, Chief Economist at Riyadh-based Banque Saudi Fransi, noting the 2.32 million barrel per day difference between what Saudi Arabia produced and its exports.

“It’s not clear if Saudi Arabia consumed the full 2.32 million barrels locally during that month, but what’s clear is that rise in local consumption is becoming eminent,” he said.

Let's not worry for the moment about Saudi Arabia's growing internal consumption eating into its export capacity, although that's a very worrisome longer term issue. Any new oil the Saudis produce now will be available for export. In my February 12 Saturday oil report I noted that OPEC had recently raised its total production by 400,000 barrels per day. Most of that had to come from Saudi Arabia, so let's set the Kingdom's current crude output at 8.67 million barrels per day.

Libya produced 1.58 million barrels per day in January according the Wall Street Journal report. If their output falls to zero, Saudi Arabia must produce 10.25 million barrels per day to completely cover the loss. I have no doubt that the Saudis can produce that much, but will they? The historical fact of the matter is that—

Saudi Arabia has not produced 10 million barrels per day since the early 1980s*

* look at this EIA data set

This all may sound farfetched to you, and perhaps it is. If not next week or next month, there will come a day in the medium-term when the Kingdom will be called upon to produce 10 million barrels per day or more. I pointed out the obvious dangers of the Saudis having almost all of the world's spare production capacity in my post Peak Oil—Where Do We Stand?

Apparently, the concerns I voiced about whether the giant Khurais field could produce 1.2 million barrels per day in a pinch have been assuaged, if Trade Arabia's Khurais pumps around 1 mbpd can be believed. I have no reason to doubt this report. The story sounds convincing.

However, we are still left with a big unanswered question: when the world needs Saudi Arabia to pump 10 million barrels of crude oil day in and day out, will they answer the call? Or will they let the oil price rise and rise as they did in 2007-2008 when the Kingdom's vaunted spare capacity failed to rescue us? Even if we don't get the answer next week or next month, we will surely know the answer by 2013.

If Libya falls apart, and Saudi Arabia does not step up to the plate, the next oil price shock will begin now, not in 2013 ± 1 year according to my latest forecast. That is the real geopolitical significance of the revolt in Libya.

Bonus Video on contagion in the Middle East

 

Comments

[BJ]

I believe the real concern is poverty, poverty in the US and around the world. What is driving the protests in northern Africa, poverty. Is democracy going to cure their poverty? Has democracy prevent poverty in the US? I could be wrong, but I suspect the global population has already exceeded the planet's ability to sustain it. As poverty increases, as a result of increased prices across the board, so will social unrest, even here in the US.

[BS]

Losing 1.6 mbbl/day is serious. However, what if Facebook really has brought about a fundamental change in the ME. All these old dictators falling or about to fall. The Saud family made the deal back in the 1940s to produce their oil. The population of KSA was 3.5 million at that time. Now is is over 30 million. Populations in all the ME countries have exploded since oil allowed it. Now the young are finished with the kings building expansive palaces while they struggle.

So what comes next? If these old relics are kicked out, what kind of oil production agreements will be put in place? Not just 1.6 million barrels are at stake. The global oil paradigm may be changing, quickly.

[Jason]

Dave - contrast your post with the stories on 60 minutes this past week. If we had a serious citizenry we would disregard stories about our politicians and there sorrowful stories about childhood abuse and stint as a male model and realize we are in serious shit.

[Bill]

If Libya goes offline the impact on the USA will be mitigated by use of the IMF reserve, that's already been announced. Nothing to see, here, keep shopping.

[Greg Hickey]

I don't think the Saudis have spare capacity, and I think that they know that they do not.
If they had plenty of oil, why are they one of the biggest employers of offshore oil rigs in the world. They are drilling for oil off of their shores.
And I believe that most of the worlds producing countries know that oil is a declining resource, and they will guard their supplies.

gh

[Dr. C.]

This is NOT a problem of spare capacity. This is a problem of industrialized and industrializing societies being suicidally committed to a way of life (monomaniacal petroleum fixation) that is unsustainable even in the short term, --if you bother to consider the environmental costs. This world is HOOKED on oil (& coal & gas), and like any junkie, it goes ape-shit at the mere suggestion that it might not be able to get its fix any longer. Or that it might have to PAY some more. If only all the junkies could really hear with unpolluted ears how ludicrous they sound whenever they start freaking out over where they're gonna get their next 85 million barrels. We don't have time to be concerned with this shit any more. We only have time to be working on what comes after -while we dial it back as rapidly as possible, because what comes after will be here so soon it'll curl your hair. A wise lady once told me it's far better to leave things before they leave you. How many times in my life I have found that to be sage advice!

It IS later than you think.

[Remi]

Well put Dr. C. Looking at climate change science, peak oil can't happen fast enough, and the projected reductions in capacity will still be too high to avoid climatic tipping points. I find it funny that on one side, we have peak oilers that project economic collapse from a mere reduction in oil production, and the climate change camp that avoids the implications of what needs to be done. We cannot go back to 350ppm with energy efficiency and renewable energy and other gadgets of the green (capitalist) economy. We have to come up with a whole new economic and political systems that have never been tried before. I have little faith that this will be attempted before our hand is forced, and by then (or already) the momentum of collapse will take a long time to slow.

[Jongoase]

Today there is many countries in the Middle East and Africa are governing by the dictators, these dictators have been over twenty years as the minimum, but Gadafi dictatorship is different, the way he governing the Libya is different philosophy, this philosophy have been applied for over forty two years, if the way today's protesters want to change the system, the country will be in civil war, and Libya will be destroy. As the said, a Gadafi is crazy guy he never leave Libya in this way, so the world has to look very carefully in both side Government and protesters, and need argent intervene.