With rising violence in Libya looking increasingly like a war, the head of Libya's national oil company said yesterday (Wednesday) that crude prices could reach $130 a barrel within a month.
But that may be just the beginning, as other analysts have raised fears of oil prices topping $200 and even $300 a barrel.
"The oil market is very sensitive," Shokri Ghanem, chairman of Libya's National Oil Corporation, told Reuters. "Speculation is very important for the market. When you see that production in an important country went down you are afraid it will go down even more."
The two-week-old uprising in Libya, which seeks to remove Col. Moammar Gadhafi from power, has severely disrupted oil production there, cutting it to about 700,000 barrels a day from 1.6 million. That, combined with similar turmoil in several other oil-producing countries in the region, has pushed prices up more than $15 a barrel in the past month.
The price of Brent crude for April hovered around $116 yesterday, just a few dollars below its recent high of $119.79 on Feb. 24.
Libyan oil production almost certainly will decline further as long as the conflict goes on. Libya's oil industry relies on the expertise of foreign workers, most of which have fled for safety. To make matters worse, most of the oil facilities lie in rebel-held areas.
"If this continues [the price] will go up and up and I won't be surprised if the prices reach as high as $130 (per barrel) or more in the next month," Ghanem said.
Neither side showed any sign of giving in yesterday, with both rebels and government forces claiming to control an oil refinery in Brega, a port town about 120 miles southwest of the rebel-controlled city of Benghazi.
Gadhafi remained defiant, telling supporters, "We will fight until the last man and last woman to defend Libya."
Meanwhile, rebel leaders called on foreign powers to launch air strikes on strategic locations to "put the nail in [Gadhafi's] coffin."
One major concern is that the worsening conflict could completely halt the flow of Libyan oil -- a strong possibility if the country descends into a lengthy civil war. The U.S. clearly is worried this could happen.
"In the years ahead, Libya could become a peaceful democracy, or it could face protracted civil war, or it could descend into chaos," Secretary of State Hillary Clinton told Congress on Tuesday.
And with many other Middle East nations experiencing their own internal strife, further threatening the world's supply of oil, crude prices could soar past even $130 a barrel.
Although Saudi Arabia in particular has volunteered to compensate for the drop in Libyan oil production, that's likely a very temporary solution because of rapidly rising global demand, according to Money Morning Contributing Writer Kent Moors, Ph.D., and an expert on global energy.
"By 2012, soaring international requirements for oil may effectively reduce the Saudi surplus to about 2 million barrels a day," Moors warns. "That reduces the effective Saudi surplus after Libyan replacement to about 400,000 barrels a day."
Moors also pointed out that Libyan oil is light sweet (low-sulfur) crude, which is easier and cheaper to refine than Saudi Arabia's crude.
"So even if the volume concerns are met, the Saudi solution will still bring about an increase in prices for the end user," Moors said.
But as bad as that sounds, the greatest fear -- a widespread toppling of regimes in the Middle East -- would create price pressures on oil that seem nearly inconceivable.
"In an absolute worst-case scenario - if the entire Middle East falls under radical control - we could be looking at $300-a-barrel oil and pump prices of $9.57 a gallon," said Money Morning Contributing Editor Martin Hutchinson.
In addition to costing motorists an extra $2,700 per year in fuel costs, such a scenario would have grave implications for the U.S. economy.
Higher oil costs would triple the U.S. balance of payments, subtracting 4% from the U.S. gross domestic product (GDP), Hutchinson said. Those payments would also threaten the dollar and drive inflation much higher.
Hutchinson advises investors hedge against such economic disaster by taking positions in two Canadian tar sands oil companies, Suncor Energy (NYSE: SU) and Cenovus Energy Inc. (NYSE ADR: CVE).
News and Related Story Links:
- Reuters:
Libya says $130 oil possible - Reuters:
Oil climbs as Gaddafi vows to fight on - Reuters:
Gaddafi strikes at town, rebels eye foreign help - Reuters:
Analysis: Coastal strip, oil key in Libya's growing conflict - Bloomberg:
Total to ‘Progressively Stop' Output at Libyan Mabruk Field - Money Morning:
This Middle East Meltdown Will Send Oil to $300 a Barrel - and Pump Prices to $9.57 a Gallon - Money Morning:
Mideast Crisis Update: Don't Count on the Saudi Oil Supply - Money Morning:
The Middle East Crisis: Egypt, Libya and Triple-Digit Oil Prices
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.