By Conley Turner
The unfolding situation in the Middle East/North Africa (MENA) is surely causing most countries to review their respective energy policies. It truly showcases the vulnerability of current oil supplies to the vagaries of geopolitics. This is especially the case with over 70 percent of the world's proven reserves being controlled by National Oil Companies (NOCs), which includes Libya.
That country's reserve of the prized "sweet" variety of crude oil (so assigned due to its low sulphur content) is recognized as the largest in Africa. However, to this point it is under the quickly diminishing control of Muammar Gaddafi, an autocrat who, according to the mainstream media, U.S. government documents described as being "mercurial" in nature.
The wave of civil uprising that has enveloped Libya is of particular interest, as most of its oil is exported. Given the present fluid state of events, it is difficult to make concrete predictions as to how matters will play out. As such, it is only an exercise in conjecture to forecast the extent of any supply disruption from that country.
Nonetheless, there is a high degree of confidence that some interruption will occur due to unconfirmed reports of the country's oil infrastructure being damaged or destroyed by agents loyal to Gaddafi. The interruption of sweet crude supply will likely translate to increased competition for this grade of oil, which is highly favored by European and U.S. refiners. It stands to reason that, as most of Libya's oil goes to Europe, those countries would be searching elsewhere to make up for the shortfall.
This geopolitical situation is one of the primary reasons for the spike in the price of the West Texas Intermediate (WTI) crude. The U.S. benchmark rose as high as $101.01 a barrel on the New York Mercantile Exchange on February 23, its highest level in about two years. On the London-based ICE Futures exchange, Brent crude for April delivery also rose, to $110 per barrel on the same trading day.
At this juncture, expectation by the market is for Saudi Arabia to step in and provide an offset for any decline in Libyan production. As the leader of OPEC, the Saudi government has conveyed its intention to increase sweet crude production by up to three million barrels from the Ghawar field. This reserve is the largest conventional oil field in the world and accounts for about half of the kingdom's total output. Libya boasts the third-largest oil production capacity in Africa, and to this point produces about 1.7 million barrels per day.
One fact that needs more consideration is that Libya has made substantial investments in the North African region. These go back to the 1970s, when Gaddafi fancied himself and his country to be the leader of the African continent. It is against this backdrop that the fall of his regime could have wider implications than just stopping the flow of oil. Economic reverberations can conceivably intensify the economic fallout throughout the region.
In addition, it is also important to pay close attention to the development of events in Bahrain. That country's monarchy is closely aligned with Saudi Arabia. While the situations on the ground there and in Saudi Arabia differ to a large degree from their less affluent neighbors, there is still a fair amount of social discontent, especially in Bahrain. The majority of Shi'a Muslims in the country have continued to express their discontent due to discrimination in employment, housing and other social limitations.
Iran, on the other hand, is the largest Shi'a country with a population of about 60 million. It is not a stretch, then, to conclude that Iran has more than a passing interest in the demise of the Bahrain regime. About 8 percent of the Saudi population is Shi'a, and they reside in the oil-rich regions of the country, but also face high levels of discrimination. If the Bahraini regime becomes another domino to topple, it would serve as a watershed moment and cause problems in Saudi Arabia, which is the largest producer in OPEC.
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