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Feb 23rd 2011, 19:58 by The Economist online
A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was
ensconced as Egypt s ruler. Now he is gone, overthrown by a display of people
power that is shaking autocratic leaders across north Africa and the Middle
East. And oil has surged above $111. Little wonder. The region provides 35% of
the world s oil. Libya, the scene of growing violence this week, produces 1.7m
of the world s 88m barrels a day (b/d).
So far prices have not been pushed up by actual disruptions to supply. Oil hit
a peak even before news emerged that some foreign oil companies operating in
Libya would stop some production and that the country s ports had temporarily
closed. As Adam Sieminski of Deutsche Bank points out, oil prices are driven
both by current conditions and by future expectations.
Oil markets don t like surprises. The sudden ousting of Mr Mubarak and the
unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a
tenth of the world s oil) have added 16% to oil prices. But the big worry is
that spreading unrest will culminate in another shock akin to the oil embargo
of 1973, the Iranian revolution or Iraq s invasion of Kuwait.
Oil is more global than it was during those previous crises. In the 1970s
production was concentrated around the Persian Gulf. Since then a gusher of
non-OPEC oil has hit markets from fields in Latin America, west Africa and
beyond. Russia overtook Saudi Arabia as the world s biggest crude supplier in
2009; OPEC s share of production has gone from around 54% in the mid-1970s to
just over 40% now.
Yet the globalisation of oil supply has not diminished OPEC s clout as the
marginal supplier of crude. Markets are tight at the moment. Bumper
inventories, built up during the downturn, are running down as the rich world
recovers and Asia puts on a remarkable growth spurt. Demand rose by a
blistering 2.7m b/d last year, according to the International Energy Agency,
and is set to grow by another 1.7m b/d this year by Deutsche Bank s reckoning.
Many other producers are already running at full capacity; OPEC has its hands
on the only spare oil (see chart).
If Libya s oil stopped flowing importers would look to Saudi Arabia to make up
the shortfall. The oil could probably flow to fill the gap in Europe, Libya s
main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but
that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with
3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten
the day when growing world demand sucks up all spare production capacity and
sends oil prices rocketing. Analysts at Nomura reckon that it would only take a
halt of exports from Algeria as well to absorb all the slack and propel oil to
a terrifying $220 a barrel.
Despite rising prices, Saudi Arabia has so far been reluctant to turn its
stopcocks. OPEC claims that the world is amply supplied with oil and seems
content with a price around $100 a barrel. Traders hope that Saudi Arabia will
boost production stealthily or that OPEC will call a special meeting to raise
quotas and calm markets.
The worst-case scenario for oil prices would be some kind of disruption to
Saudi supply itself. That concern has become livelier given the unrest in
neighbouring Bahrain. The tiny island kingdom produces little oil but is of
vital strategic importance in the Persian Gulf, a seaway that carries 18% of
the world s oil. America s 5th Fleet, which polices the Gulf against
troublemakers (ie, Iran), uses the country as a base.
The Saudis may also fear that protests by Bahrain s Shia population could spill
over their own borders. Saudi Arabia s eastern provinces are home to both its
oil industry and most of its Shias, who may also have cause for grievance with
their Sunni rulers. One crumb of comfort is that oil facilities across the
region are generally located far from the population centres, where protests
tend to be concentrated, and are well defended against anything but a concerted
military assault.
Building stockpiles
What might be the effects of a more general supply crisis in the Middle East
and north Africa? The oil shocks of the 1970s spurred the world to build
stockpiles, such as the 750m barrels of crude oil in America s strategic
petroleum reserve, to be drawn on in the event of upheaval in the Middle East.
China is building a strategic reserve of its own. America s Energy Information
Administration puts total world stocks in the hands of governments and industry
at an immense 4.3 billion barrels, equivalent to nearly 50 days of global
consumption at current rates.
The impact of a crisis would therefore depend on how much oil production was
lost and for how long. Even seismic shocks in oil-producing countries might not
cut off supplies for very long. Yet the example of Iran shows what can go
wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank,
points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched
Western oil experts and capital, and it has never come close to matching that
level of output since; it now produces just 3.7m b/d. Middle Eastern oil is
largely state-controlled but, as Amrita Sen of Barclays Capital observes,
foreign investment remains vital to north Africa s oil industry. If new regimes
emerged that were more hostile to outsiders, that might have a lasting effect
on production.
The world could probably weather a short-lived crisis. But the damage if oil
prices spiked and stayed high for a long time could be great for the recovering
economies of the rich world. As for the prospects of reducing the importance of
the Middle East to global oil supplies, forget it. Strong Asian demand is
likely to mean that OPEC s share of oil production rises again as it pumps
extra output eastward. A troubled region s capacity to cause trouble will not
diminish.