What would Gaddafi’s fall mean for oil prices?

BRAD PLUMMER | AUGUST 2011 | SOURCE: Washington Post

Back before civil war broke out in Libya, the country had been producing about 1.6 million barrels of oil a day — roughly 2 percent of the world’s supply. Then the insurgency against Moammar Gaddafi’s regime erupted in February, and the oil stopped flowing.

That disruption, naturally, caused oil prices to spike, with U.S. prices reaching $112 per barrel at one point before settling back down (the current price is $82 per barrel). So now that Libya’s rebels have taken Tripoli and the end of major fighting could be in sight, does that mean oil prices are going to fall even further?

What would Gaddafi’s fall mean for oil prices?

Earlier this morning, markets showed some early signs of optimism, with Europe’s Brent crude index dropping more than 2 percent. The new Libyan government will need revenues, after all, and presumably it will be eager to start pumping out crude as soon as possible.

But energy analysts warn that optimism might be premature. For one, says Julian Lee of the Centre for Global Energy Studies, it’s not clear if fighting has fully subsided, if the rebels have total control of Libya, or what type of new government will arise.

“There is going to be the huge issue of dealing with administrative dislocations that have been caused by six months of fighting,” Lee says. “Ministries aren’t working anymore, people holding key positions have either disappeared or defected or are felt not to be trustworthy. That whole process takes time.” (Libya’s two previous oil ministers have already defected, for instance, and it’s unclear whether either will be welcomed back).

It will also take awhile, Lee notes, to assess the damage done to Libya’s infrastructure. Many of Libya’s pipelines and refineries are located in the northeast, which happens to be the same region where Libya’s rebels were based and which sustained heavy tank and artillery fire from Gaddafi’s loyalist forces.

As a result, time frames for recovery vary wildly. One Libyan oil official told Reuters that production could resume in “perhaps two or three weeks,” while the International Energy Agency cited a Libyan oil producer, ENI, saying “it would need at minimum a full year to restore production.”

Either way, observers warn, don’t expect oil prices to drop too much further. Since fighting broke out, Saudi Arabia has tried to compensate for the Libya shortfall by ramping up its own production. (Many analysts believe, however, that Saudi Arabia did too little too late to prevent a sharp price spike in the spring.)

If Libyan crude starts trickling into the market again, Saudi Arabia is likely to cut back its own production to try to maintain price levels. “Saudi Arabia has been boosting social spending in the last few months to avoid the sort of unrest we’re seeing around the region, so they need to keep oil prices relatively high — probably around $90 per barrel or so,” Lee says.

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