Labor demonstrations in eastern Libya have forced the closure of a key port for nearly a week. A small band of protesters have created big problems for the country as it tries to chart a sustainable course nearly two years after revolution. The revival of some oil developments in Libya in early July helped pull oil prices back from 15-month highs. The post-revolutionary government, however, has shown it doesn't quite have the foundation built to succeed economically this early in the game. The internal failures of Arab governments, meanwhile, are starting to have global implications that extend beyond foreign affairs. Without some advances, the region may start to bring the rest of the world down with it.
Libyan authorities said the situation in the eastern port of Zueitina is much as it was last week when a small group of protesters managed to shut the port down, demanding better employment prospects. Oil production from Libya hasn't yet returned to its pre-war levels. The problem is exacerbated further when considering facilities tied to the port handle about 20 percent of Libya's oil exports. When war closed most of Libya down in 2011, the International Energy Agency called for a release of strategic petroleum reserves. There's no immediate sign that will happen this time around because political tensions appear more of a market driver than supply issues.
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U.S. crude oil prices July 8 fell from a 15-month high to settle at $103.14 in response to word the Sharara oil field in Libya was about to resume operations after authorities there reached a deal with armed bandits, who closed it down in June. Oil markets by then had been reacting to the July 3rd ouster of Egyptian President Mohamed Morsi. By Monday, crude oil was trading at $107.10, nearly 4 percent higher than when analysts were predicting the bulls had run out of steam because of Libyan expectations.
Unrest in the Middle East is responsible for much of the increase in oil prices for July. That, in turn, has trickled down to consumers in the United States and China, where gasoline prices are on a steady march upward. That leaves consumers in the two leading economies with less money to spend at a time when market recovery hangs in the balance. In the United States, pro-energy lawmakers contend more domestic energy production would shield U.S. markets from Middle East issues. Already U.S. legislators are clamoring over retail prices, though traders were quick to remind them crude oil is a commodity traded on the global market.
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Generally speaking, spending drives capitalism and without spending, those economies fail. Higher prices at the pump, no matter how great the U.S. oil boom, mean less spending on other things that drive the economy. Gasoline prices typically start to decline as summer fades. Pressure on oil markets, however, should continue as post-Arab Spring governments find it hard to deliver on their promises. It's unlikely the global market will experience a crisis like the one in 2011, when Libya was shut out of the oil market completely. But while the poles are shifting away from the Middle East in terms of oil production, global economic concerns and conditions remained anchored solidly to the region.
By. Daniel J. Graeber of Oilprice.com
In the Middle East, the cost of production is less than $20 per barrel of oil.
Outside the Middle East, the cost of production for the most expensive new fields is now at around $100 per barrel of oil.
Bernstein Research estimated that the non-Opec marginal cost of production - the cost of production for the most expensive new fields - rose to $104.50 a barrel in 2012.
The IEA estimates it costs between $4 and $6 to produce each barrel of oil from the conventional fields in Saudi Arabia and Iraq, including capital expenditures. Algerian, Iranian, Libyan, and Qatari fields cost slightly more, at about $10 to $15 per barrel.
We like it or not, the Middle East is the only place that can lower oil prices.