Oil and Arab Unrest: The Price of Fear
Source: The Economist (3/3/11)
"Saudi Arabia is traders' chief worry but it's also the world's chief hope."
Two factors determine the price of a barrel of oil: the fundamental laws of supply and demand, and naked fear. Both are being tested by the violence that is tearing through Libya, the world's 13th-largest oil exporter. The price of a barrel of Brent crude now hovers around $115. On February 24, however, it rose to almost $120, as traders realized that they might have to do for a while without some or all of Libya's exports some 1.4 million barrels per day (Mbpd).
The situation in Libya is grim, as the rebels and Muammar Qaddafi's forces battle for control of the country's only resource. Brega, the seat of the Sirte Oil Company in the east of the country, has changed hands three times in recent days. Most of the oil workers have fled, and production has fallen by two-thirds. The ports of As Sidra, Brega, Ras Lanuf, Tobruk and Zuetina, which together handle almost 80% of Libya's oil exports, were all seized by the rebels; two have now been retaken by Qaddafi's forces. The rebels remain in control of Africa's largest oilfield, Sarir, pumping some 400,000 barrels on a normal day. But for how long?
The instability's spread to Bahrain, Oman and the Gulf has created a whole new dimension of anxiety. North Africa produces 5% of the world's oil, but the Middle East produces 30%. And Bahrain's problems are on Saudi Arabia's doorstep. These bear on the situation in the eastern Saudi provinces, from which a huge quantity of oil is pumped into global markets.
Saudi Arabia is therefore the traders' chief worry. But it is also, in oil terms, the world's chief hope. It is the only producer with significant spare capacity that could quickly be released if the oil price rose too high.