Oil is yet again negatively affecting the global economy and as prices continue to escalate, the stability of the modest economic recovery is thought to be in jeopardy.
After 18 days of protests leading to Hosni Mubarak vacating his post of Egyptian president on February 11th and the uprising in Libya resulting in 100s of deaths at the hands of Moammar Gadhafi, questions have focused not only about the nations’ political and social futures, but also on oil markets (but barely news about food prices). Such a focus should highlight the need to be weaned off of the liquid.
Initially, The Egyptian Revolution of 2011 threw oil markets for a wild ride, launching Brent Crude over $100/barrel for the first time since 2008. However, when analyzing the data, the Suez Canal and the Suez-Mediterranean (Sumed) pipeline are not essential for oil transit, nor is Egypt an oil player.
In 2010, tankers transited the Suez averaging less than 1 million barrels per day (bpd). Also in 2010, the Sumed pipeline accounted for 1.15 million bpd of crude oil flows. Globally, close to 88 million bpd are supplied, Egypt produces 660,000 bpd and is a net importer. Furthermore, if the Suez or Sumed were closed, tankers could be directed around the Cape of Good Hope, adding time and cost to trips, but not an insurmountable obstacle with the expanded use of very large and ultra large crude carriers.
However, Libya, the first oil exporting nation to be engulfed in the political upheaval, has sent further shocks to oil markets. Brent Crude is near $120/barrel and is anticipated to continue to increase as the unrest persists. Energy companies working in Libya have evacuated staff members and halted some work. There is also uncertainty if Gadhafi will sabotage the wells or if rebels will cease shipments causing further market disruption. This price spike also partly reflects fear that the unrest could move to larger producers, again proving that markets will act first and think later.
Libya has the largest oil reserves in Africa, estimated to tally 44 billion barrels, which stretches from the Mediterranean into the Sahara. It is the 3rd largest exporter on the continent and 12th largest globally with 1.6 million bpd of light, sweet crude, 79% of which goes directly to Europe. To attempt to stabilize the new shortages, Saudi Arabia is discussing increasing oil supply to Europe or increasing its supply to Asia while West African oil is rerouted to Europe.
These breathing case studies lead to question what if the unrest does reach the House of Saud, where King Abdullah offered $36 billion in benefits to the population in hopes of staving off protests, or if the shipping channel through the Straight of Hormuz is closed off? Will oil jump to $150, $175, over $200/barrel and plant the seed to reverse the economic recovery?
While the effects of the uprisings are now beginning to eat into our wallets at the pump, it is important to remember the narrative should not be focused solely through the lens of the impact on oil. It should continue to spotlight the quest for the freedoms and dignity that people are demanding.
By Joe Gurowsky
Photo attributed to: Jacques Delarue