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Monday, February 28, 2011

Libya May Push Oil Beyond Record Levels

The pro-democracy revolution in Egypt had only a limited impact on the markets, given its tiny role as an oil exporter. From the transport point of view as well, Suez Canal has allowed the traffic (>5% of total traffic) so far. However, the case of Libya is different – it the first time since the revolt broke out in Tunisia that the impact of sagging oil supply is being felt.
 
Overshooting Oil

The crude prices in the international market have already started to feel the heat, almost repeating their 2008 recession rally. On February 25, 2011, U.S. oil prices touched $103 per barrel, before plunging to $93 the following day. The London Brent for April delivery shot up to $113.91 per barrel on Thursday. The wider concerns relate to the cumulative effects of the Jasmine Revolution on the fuel production and supplies. This is particularly true for the already ailing world economy, where most of the nations are still struggling with the aftermath of the sub-prime crisis. Any fresh spike in the fuel prices is likely to give a severe blow to the economic recovery. Meanwhile, the market-watcher haves come up with some rather grim forecasts, expecting a further rise to $115-$120 per barrel in the short-term. If the crisis escalates further, the market may witness historical highs of around $220 per barrel!

 
The Problem Areas

The reason why the Jasmine Revolution is so powerful is that it bolsters the common demand for democracy in a number of countries, including some of the OPEC members. Tunisia was the first affected nation and the internet helped the stir spread, in a matter of days, to other dictatorial and communist regimes - China, Gabon, Libya, Bahrain, Algeria, Egypt, Morocco, Iran and others. The Governments are working hard at controlling the responsible websites and forums to prevent the protestors from coordinating the movement any further. In Libya, Gaddafi has gone a step ahead, deploying the military and resorting to state-sponsored violence. The Government quarters have threatened to destroy some key oil wells and other supply lines, a move that may cause irreversible damage to the Libyan economy.


The Positive Side

The brutal reaction from the Gaddafi-led government has invited attention from the international community. The U.N. is planning sanctions against the country, while UK and France may impose arms embargo. NATO has also taken cognizance in the matter and most of the nations are against Gaddafi. If the international pressure forces the Dictator to quit, peace may eventually be restored and Libyan oil exports may be resumed. The major economies have already stocked excess fuel to meet contingencies and the other OPEC nations are planning to ramp up their domestic production, in case the situation worsens. Further, Libya is a big crude exporter, yet it constitutes less than 1% of the global volumes. The transportation through the Suez Canal is also not under any immediate threat.

Though such emergency measures may check the soaring oil for the time being, the volatility will continue unless the revolt reaches its destination, whatever it may be!
 
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