Unrest and its Effect on Oil

We’ve all watched with uncertainty as an uprising in a small North African country more than a month ago has turned into a revolution for the entire region. The turmoil has sent global markets tumbling and oil prices above $100 per barrel for the first time since 2008.

The events are unfolding so quickly that it may be difficult to keep up to speed. I’ve found two good sources which help explain what is going on. The first is from The Wall Street Journal and is an interactive timeline that takes you all the way back to December when the first signs of unrest began in Tunisia. You can also get a country-by-country breakdown of the latest events and key statistics at CNN.com. The breakdown also includes some insightful maps and details on the origins of the uprisings.

Oil has increased because many are expecting delays, if not an extended shutdown, of Libya’s oil production. An Organization of Petroleum Exporting Countries (OPEC) member, Libya is heavily dependent on its oil. The hydrocarbon industry accounted for 95 percent of export earnings and 80 percent of the country’s fiscal revenues in 2008, according to data from the International Monetary Fund and the U.S. Energy Information Administration.

The country produces 1.58 million barrels per day of oil, roughly 2 percent of global oil supply. Most of this oil gets shipped to Western Europe, China and even the U.S. Other countries, such as Algeria, which is Libya’s western neighbor and produces 1.25 million barrels per day, haven’t seen the same degree of protest, as of yet.

Amidst the turmoil and uncertainty, it’s important to remember this is a short-term spike. We expected to see $100 per barrel of oil prices some time this year and the uprising in Libya isn’t going to shut down the world’s oil industry.

If it turns out that Libya’s production is shut down for an extended period of time, the market will eventually adjust. In fact, OPEC is sitting on three times Libya’s daily oil production in excess production capacity, according to Zacks Investment Research.

What is more important for the long-term oil story is the economic recovery. Already in the U.S. gasoline prices have hit seasonal highs. In order for oil prices to maintain these levels, demand must be resilient. As Zacks says “oil spikes have a history of getting in the way of economic stability and growth.”

BCA Research has some interesting data regarding the economic impact of rising oil prices. The firm says that every $10 rise in oil prices translates into a 0.1-0.2 percent reduction in economic growth. This reduction doesn’t mean much when we have a slow rise in prices over an extended period of time, but can become meaningful during a compressed time period.

We expect more volatility in the near term as revolutionary forces overthrow oppressive regimes but our focus remains on the strength of the global economic recovery and its ability to withstand higher gasoline and energy prices.

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