IEEJ: March 2011
Special Bulletin
A Japanese Perspective on the International Energy Landscape (32)

February 25, 2011

Intensifying Turmoil in Libya and Future Crude Oil Prices

Ken Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, JapanOn February 23, the North Sea Brent crude oil futures price posted a sharp rise of morethan $5/barrel from the previous day to $111.25/barrel. On the next day, the price rose further
temporarily to $119.79/barrel, nearing the $120 level. The West Texas Intermediate crude oil futures
price, whose widening gap with the Brent price had been attracting attention, also soared
substantially, hitting the $100/barrel mark temporarily on February 23. It closed the day at$98.10/barrel, rising nearly $12 from February 18.
It may be needless to say that the sharp crude oil price hikes resulted from the extreme
intensification of tensions in Libya. Growing antigovernment movements, the military’s armed
suppression of these movements, the escalation of their clashes, antigovernment forces’ control ofBenghazi as Libya’s second largest city, some senior officials’ bolt from the Gaddafi administration,and other developments are marking out growing confusion and indicating a serious political andsecurity situation close to civil war. More important is the fact that these developments have actuallyaffected Libyan oil supply. The Libyan situation indicates that the first serious oil supply problem
has emerged with regard to the Middle Eastern and North African domino effect that started with theTunisian political change followed by the Egyptian crisis and the Libyan upheaval. Amid theEgyptian crisis, fears of oil supply interruptions regarding oil transportation route through the Suez
Canal and the other contributed to boosting crude oil prices before Egyptian President Hosni
Mubarak’s resignation. But no actual supply interruption came on the Egyptian crisis. However, theLibyan upheaval has led to an actual interruption beyond what had been feared.
Libya, as an oil producing country, is more important than Egypt as far as oil supply isconcerned. Libya is a major oil producer, boasting the largest oil reserves (at 44.3 billion barrels
according to BP Statistics) among African countries. In January 2011, its crude oil production came
to 1.58 million bpd. Libya produces mainly high-quality crude oil that is light in API gravity andcontains less sulfur. Libyan crude oil has been exported to European countries including Italy,
Germany, France and Spain. Libya is a very important crude oil supplier for Europe. It also exports

IEEJ: March 2011
gas to Europe mainly through the Greenstream pipeline linked to Italy. Pipeline gas exports toEurope totaled 9.17 billion cubic meters in 2009. Libya has exported LNG as well. LNG exports
came to 0.72 billion cubic meters in 2009. The problem is that crude oil production has beensuspended at some oilfields as many international oil companies such as Wintershall, ENI, Total, BPand Repsol have, for security reasons, already withdrawn their staffs from major oilfields andproduction/export facilities that exist primarily in regions coming under the control ofantigovernment forces. Although it is difficult to estimate a production decline amid the confusion,
the decline could be considerable. Barclays Capital, for example, has estimated that the decline on
the production suspension has reached 1 million bpd and could expand further.
Another problem is that the present Libyan situation is more serious than the Egyptiancrisis. Developments are very uncertain and any path to the termination of the confusion is difficult
to foresee. The actual civil war situation and security deterioration in Libya could be longer than inEgypt. Colonel Muammar Gaddafi is likely to continue using force to remain in power even underEuropean and American pressures. While Libya has indigenous tribal forces, the military is unlikely
to become any stabilizer after firing shots at citizens. Given these conditions, it is very difficult for
us to expect the stabilization of the political and security situation and the subsequent normalizationof oil production in Libya. This means that a considerable amount of Libyan crude oil could remain
lost for several (or more) months in the market. Although the loss might have already been priced
into the market, Libyan developments including the continuing and expanding suspension of oil
production may basically continue to exert upward pressures on crude oil prices.
To what will the market pay attention next under the circumstances? First, the market will
maintain close watch on developments in the Libyan situation. The second key point for attention isresponses from OPEC, including Saudi Arabia. Attracting global attention will be when and how
much Saudi Arabia, known for giving priority to the stabilization of the oil market, would increaseoil production in response to the actual supply interruption lasting for a considerably long time.
According to the IEA, OPEC’s surplus crude oil production capacity stood at 5.19 million bpd as ofJanuary, of which Saudi Arabia accounted for 3.5 million bpd or 67%. The surplus capacity is
estimated to sufficiently cover a decline in supply from Libya. But we must pay attention to the factthat the effects of oil producing countries’ additional production expansion are uncertain. When will
Saudi Arabia and other OPEC members increase oil production? How strong will their signal ofcommitment to stabilizing the market be? How will the market assess qualitative differences
between Libyan and Saudi crude oils and a drop in surplus OPEC production capacity after aproduction increase? Answers to these questions are uncertain.
The third key point for attention is oil consuming countries’ response including
market-stabilizing efforts through their release of oil reserves. The IEA, the EU which was affected
directly by the Libyan oil supply interruption, the United States which concerned about rising crude

IEEJ: March 2011
oil prices for its impacts on its economy, and other parties might have started discussions on therelease of reserves for stabilizing the market and international cooperation. The sharp crude oil pricehike on an actual supply interruption is a key point in considering discussions on whether to use oil
reserves for stabilizing the market. If oil producing countries’ output expansion is the first measuretaken to stabilize the market, oil consuming countries may seriously consider their own
market-stabilizing measures while watching future market developments and how the Libyan
turmoil would spill over to other oil producing countries, as discussed below.
The fourth key point for attention is the Libyan turmoil’s potential spillover to other oil
producing countries. In this respect, attention may be paid to such countries as Algeria and Iranwhere antigovernment movements have already been seen. But oil market participants may pay
attention to Bahrain and Saudi Arabia. Antigovernment demonstrations and the government’s
repressive actions in Bahrain occupied media headlines temporarily. But the Bahraini turmoil seems
to have been hidden behind the intensifying Libyan turmoil. Nevertheless, Bahrain entails numerous
uncertain or opaque factors including the unique Bahraini situation (where the Shiite majority has
structural discontent with and is in opposition to the Sunni minority in power), Bahrain’s close
relations with Saudi Arabia, and the presence of considerable numbers of Shiite citizens close tomajor Saudi oilfields. The Saudi situation is stable at present and has yet to become any matter ofconcern. Given its large oil production volume and its great surplus oil production capacity as amarket-stabilizing tool, however, Saudi Arabia is far more important than other oil producing nations.
Even groundless speculations about Saudi Arabia could become an important market-affecting
factor.
Predictions and speculations about future developments play a key role in pricing crude oil.
In this sense, information provided to the market is very significant. In the second half of last year
and early this year, macroeconomic information including that on U.S. quantitative monetary easing
and world economic recovery had been a key factor affecting the market. But geopolitical risks havenow become the most important market-affecting factor. For the immediate future, crude oil prices
will make unstable moves including further hikes under the presence of geopolitical risks that
actually affect oil supply.
Contact: report@tky.ieej.or.jp

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