The Oily Situation in the Arab World

Posted on March 8, 2011 in GlobeScope


By Anirudh Nimmagadda:

That 2011 has been a year of change is as gross an understatement as one can possibly hope to chance upon. A great deal of civil resistance has cropped up in the Arab world, with Algeria, Bahrain, Egypt, Iran, Jordan, Libya, Morocco, Tunisia, and Yemen all having seen major protests in the past three months. Minor incidents have occurred in Iraq, Kuwait, Mauritania, Oman, Saudi Arabia, Somalia, Sudan and Syria.

The most remarkable among these are undoubtedly the successful revolts in Tunisia and Egypt, which have resulted in Ben Ali, President of the Tunisian Republic, and Hosni Mubarak, Egypt’s dictator of thirty years, being driven from their positions of influence, and their gilded palaces, in disgrace. While one could say that the clarion call for liberty in the Middle East has found a measure of success, there still is a country, in the throes of revolution, where the oppressors remain at large: Libya.

The despot Muammar Gaddafi’s egregious response to protests against his rule has evinced outrage all around the world. News of warplanes and helicopters opening gunfire and dropping bombs on masses of civilian demonstrators continues to shock us. Already, hundreds of protestors have fallen to military forces ‘striking back’ on Gaddafi’s orders; some sources put the number of casualties at over one thousand. Conventional mass media channels and the internet are teaming with reports on the reactions of different nations to this violence. In one of the more forthright denunciations of Gaddafi, the German Chancellor Angela Merkel has articulated that he has “… declared war on his own people.”

While the repercussions of the revolt in Libya seem, at first glance, to be localized to the country itself, financial markets around the world have had adverse reactions to the instability, with near-record volatility causing oil prices to rise to a two-and-a-half year high at $112 a barrel (the average for the same period had been about $68), and subsequently collapse on rumors (since proven false) of Gaddafi’s death.

Analysts have worried over the past few days that there may be an element of truth to rumors of Gaddafi ordering the sabotaging of Libyan oil pipelines and refineries. Owing to Libya holding the largest proven oil reserves in Africa, such an event could quite possibly cause a catastrophe on the scale of the 1973 oil crisis which, apart from causing dramatic inflation (the price of oil quadrupled from $3 per barrel to $12), compounded the stock market crash of 1973-1974.

The Global Trade Atlas reports that in 2009, the vast majority of Libyan crude oil exports were to European countries like Italy, Germany, France, and Spain. While this continued to be the case through 2010, the country that will be worst affected by a disruption in Libyan oil supply today is Israel, which has already had its natural gas pipeline from Egypt, which accounted for nearly 40% of nationwide demand, sabotaged. Between the shortage of natural gas from Egypt, and that of Libyan oil, Israel might find itself facing severe spikes in costs in its transportation, airline, commodities, and tourism industries, all of which depend a great deal on non-renewable energy sources.

While it is almost a certainty that world oil markets will suffer setbacks due to the aforementioned events, their scale is still a topic of dispute, and one is inclined to believe that the other members of the OPEC are prepared to soften the blow. Nigeria and Algeria, the two OPEC nations with the largest oil reserves after Libya, are expected to increase production to bolster falling supply and meet the unchanged demand. The talks engaged in by Saudi Arabia with European oil refiners to make up for the loss of Libyan crude may also help in this regard, and with rumors of the US choosing to release emergency oil stockpiles pushing prices down over the short term, it seems the world is well prepared to meet the crisis that looms on the horizon.