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Dian L. Chu

Dian L. Chu

Dian L. Chu, is a market analyst at EconMatters.EconMatters  is made up of a team of financial and market analysts who research, analyze, and write…

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Oil Supply Crisis From War in Libya? Free Trade Begs to Differ

The recent news from Libya suggests that a transitional government is already being put in place as BBC reports that Libya's opposition groups is set to export first oil shipment, and are making plans to load a tanker due to dock at a terminal near Tobruk. And there were unconfirmed reports that the tanker en route to Libya was the Liberia-flagged Equator vessel, owned by Greece-based Dynacom Management, according to BBC.

Rebels Making Oil Deal

That news came following the annoucement by Ali Tarhouni, the finance minister for the Libyan opposition, a University of Washington lecturer who returned to Libya nearly a month ago to help the opposition, that Libyan rebels have signed a deal with Qatar to market their crude oil abroad in exchange for food, medicine and fuel. In late March, Tarhoni also said the rebels, who were at the time in control of all the country's eastern oil facilities, expected to begin exporting crude "in less than a week".

Libyan Oil Offline For Years?

This suggests that much of the fear that Libya oil export could be offline 'for years' or even ‘indefinitely’ seems to be somewhat hyperbole, and a bit of a red herring. It appears that the Qaddafi regime is crumbling according to information gleaned from the recent defection of Libyan Foreign Minister Moussa Koussa, and it could be only a matter of time before the unrest in Libya is resolved with the stepping down of Qaddafi.

Recent news also pointed to members of the Qaddafi regime were trying to negotiate a way out of their current predicament, once the no-fly zone was established. By the way, no-fly zone essentially means the oil assets are pretty safe from harm, while realistically, both sides were never going to harm the oil assets, as that is how all of their power is derived--no oil assets equates to no power in Libya.

Saudi’s New Light Sweet Blend

Then, if you look at the production level relative to the world’s, you’d realize Libya’s production is about 1.7 million barrels per day (bpd), accounting for less than 2% of the world’s 88 million bpd of oil. Out of the 1.7 million bpd, Europe is the Libya’s top crude customer with 11 countries importing about 1.1 million bpd, according to The Economist (See Chart).

Libyan Crude Oil

So, even if in the unlikely event that Libyan oil is totally off the market for an extended period of time, the shortfall could easily either be made up by rising production from other oil producing regions or by substitutions.  For example, despite doubt that Saudi’s high sulphur, sour crude would be an adequate substitute for Libyan light sweet crude, Saudi Aramco has come up with a new light sweet blend, and just sold EU buyers around 2 million barrels to replace the disrupted Libyan barrels.

Sanctions Leakage

Furthermore, even though the United Nations specifically named state oil company the Libyan National Oil Corporation (NOC) in its list of entities whose assets are frozen, analysts have said eventually there might be some significant sanctions leakage.  After all, oil is a valuable commodity, and one way or the other, Libyan oil is going to find its way onto the market.

Given that Oil is a also fungible commodity, this essentially means more supply added to the total world oil market since the Saudi’s already covering 100% of the loss from Libya`s disruption, and this just serves as bonus supply on the world oil market.

Economics Trumps Politics

All of this eventually has let me to realize that the laws of free trade, mutually consistent interests, and economic survival transcends the politics and even political revolutions of individual countries. For the oil exporting countries, their main source of income is oil, and their sole survival is based upon financial means.

Regardless of who is in power in Libya, Gabon, Nigeria, or even in Saudi, oil is a means to an end for any government, and will be made available to the world market in the form of trade as it is the only way these governments could stay in power given that this is their sole source of revenue.

Free Trade Transcends Revolution

In short, there isn`t going to be much of a long-term or massive supply threat due to the democratization of the MENA (Middle East and North Africa) region. The world has a long and storied history of countries which undergo revolutions, governmental transitions, etc., and there remains a consistent record of their continual exchange of goods and services where it is in the best interest of all parties involved to continue trading relations.

Free trade is a concept that is bigger than individual governments, and even governments with divergent views on many issues throughout history still manage to agree on certain commonalities and conduct trade when based upon mutually beneficial interests, i.e., each side has something of value important to the other party and worthy of trade.

Fear, Speculation vs. Facts

So, the idea that Libyan oil is going to be locked in 100% and off the market for even six months is a bit of a red herring, and contradictory to the history of trade relations. Even the North Koreans have trading partners in the midst of numerous sanctions by the world community.

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There is a lot of fear mongering, hyperbole, and exaggeration taking place right now in the oil market mostly on behalf of speculators with a vested interest in exploiting the current political upheavals in the MENA region in order to push up the price of Crude Oil, and make a lot of money.

Oftentimes, they are just speculations with very little fact to support much of the claims being bandied about regarding legitimate supply shortages in the Oil market. It is tantamount to yelling fire in a crowded movie theatre, and in the end, the stampede could run over whoever started the fire screaming in the first place. 

By. Dian L. Chu

Dian L. Chu is a market analyst, founder and editor of EconMatters.


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Leave a comment
  • Anonymous on April 08 2011 said:
    "For example,...Saudi Aramco has come up with a new light sweet blend,...to replace the disrupted Libyan barrels."Just like that?There was an article, some time back that explained exactly why Libyan crude was so important. Now Dian Chu a market analyst (is she in the oil business?) tells us almost flippantly, 'Oh Saudi Aramco have just come up with a substitute' so all is well with the world...I would really appreciate some clarification here, not from the author but from someone who knows the oil business, as to how technically plausible/possible all this is. I am aware from background reading, that all is not well with Saudi production. But I know next to nothing about Libyan production, and would prefer someone in the know, other than the author, to fill me in with technically sound infiormation. Does the author 'know' any more than I do or is all this just journalistic hyperbole and wishful thinking?

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