Why the Disruption of Libyan Oil Has Led to a Price Spike

[groovedaddy]

HOUSTON — Crude oil prices reached $100 a barrel in the United States on Wednesday, the highest price in more than two years, as Middle East oil flows were interrupted this week for the first time since the region’s turmoil began.

Multinational oil companies have curtailed production in Libya as protesters engage in violent confrontation with the government of Col. Muammar el-Qaddafi. Analysts estimate that as many as a million barrels of Libyan oil a day have been removed from world markets in recent days, and investors fear that more oil production could be disrupted if the unrest spreads to other crucial producing nations, like Algeria.

More broadly, economists are concerned that if oil prices stay high this year, they could slow the already fragile global economic recovery. As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.

Libya produces less than 2 percent of the world’s oil, and exports little to the United States. But the high quality of its reserves magnifies its importance in world markets.

http://www.nytimes.com/2011/02/24/business/energy-environment/24oil.html?nl=todaysheadlines&emc=tha25

[dipsydoodle]

1. Aside from which

Libya supplies 27% of Italy's needs. The Italians will now buy elsewhere that which would otherwise have been bought by others.

[damntexdem]

2. And aside from all that, oil companies use any excuse to raise prices.

The proof of that comes when the prices don't drop when a "crisis" is over as fast as they rose during the "crisis."

[spin]

3. + 1000

[groovedaddy]

4. Yep. n.t

[Spider Jerusalem]

5. Not really; it's not the oil companies, it's the market.

Oil is a commodity traded on a global market. The price is set by the market, not by oil companies. There's a technical floor for pricing (the cost of exploration, recovery, and delivery), but prices beyond that are set by market forces. The market is a futures market; it operates on bidding for crude contracts for delivery at some future date. Supply constraints due to either demand exceeding available capacity or reduced capacity due to disruption (as we see in Libya at the moment for instance) when demand is at c. 86M bbl/day and relatively inelastic, and supply is at c. 85-86M bbl/day (including natural gas liquids and condensates, tar sands, etc) mean that a sudden disruption on the order of hundreds of thousands to a million-plus barrels per day has a greatly magnified effect on price, since there is no longer enough crude for say March or April delivery to meed demand. Making up the inventory shortfall takes time and doesn't happen right away, and the pricing is more or less locked in for some period since we're talking about futures contracts. Just because the crisis is over doesn't mean that suddenly the lost production from that period magically appears.

And in the case of Libya it's more problematic because there are only a few oil provinces that produce equivalent grades of low-sulfur light, sweet crude; the only comparable crudes in terms of quality are Brent, West Texas Intermediate, and Caspian Sea oil. The North Sea doesn't have the spare production capacity to make up a 1.2M barrel shortfall; neither do Texas or Oklahoma; neither does Azerbaijan. And even if they did increasing production by that much isn't a matter of flicking a switch. The available spare capacity is mostly Saudi oil which has higher sulfur content and which most refineries can't process.

[GliderGuider]

6. Good explanation. Thanks.

I'm always surprised by the number of people after all this time who have no real idea how the oil supply and oil market works.

[BeFree]

7. eh?

You seem to think there is a free market? It is not. It is tightly controlled. And profit driven.

Do you know how many wells are closed off? No. How many are pumping limited amounts? No.

I really wish people would not talk as if the market moves in any way except to increase profits for the short term.

Sure, we will run out of oil in the distant future. For now, today, you can get all the oil you want. And it will remain that way for many, many years. There is no real shortage.

[BridgeTheGap]

8. And capitalists would never MANIPULATE markets to turn a situation to their advantage, right?

But that's what governments are there for, to regulate and make sure such things don't happen. And the recent history/performance of the finanical services industry inspires confidence that markets always determine what happens, the government will regulate where necessary and CEOs always make decisions based on what's good for society as a whole.