Libya’s Effect On World Oil Prices – Fact Or Fiction?
The political turmoil in Libya has caused much speculation in the world market especially in the oil sector. The country’s political and economical instability has lead to drastic increase of oil prices in the world market. Now we ask, is Libya’s market share in the oil trading industry really significant to affect the world oil prices?
Libya, a member of the Organization of Petroleum Exporting Countries (OPEC), is known as the third largest oil producer in Africa. The political upheaval in Libya has caused shut down of operations in its oil plants thereby decreasing the country’s daily production output, their export to their trade partners and, consequently the supply of oil in these countries. However, Libya’s contribution to the world market is only 2%, other neighboring oil producing countries can compensate for the decrease in oil supply by producing more. The net decrease in the supply of oil will not be significant so as to affect an increase in the world market.
Other members of the OPEC, including Saudi Arabia the second largest oil producer in the world, have committed to increase their production to counterbalance the shortfall in Libya’s output but the steep price of oil still remain. At this point the volatility of the price in oil trading does not depend on the law of supply and demand alone. Oil traders and speculators take other factors into consideration such as the political stability of the country and the economic environment. The uncertainty that prevails in Libya affects the market significantly.
The traders are not only concerned with Libya’s political crisis but of the effect of this crisis in North Africa and Middle East countries as well. Their concern is further aggravated by the fact that other countries like Yemen, Bahrain and Syria are following suit in this political chaos as civilians clamor for political change. The recent turn of events laid bare the wave of unrest that engulfed the Middle East countries. This crisis in the Middle East post a significant impact in the market as this could mean a longer disruption in oil exportation to countries, like China and the United States, that are dependent on Middle East countries for their oil supply.
The temporary set-back in the OPEC oil cartel resulting from Libya’s uprising can be mitigated by other members. However, a repeat of the Persian Gulf War situation looms the horizon causing anxiety to traders. If this situation in Libya goes on damaging oil facilities, or worse, spread across the Middle East including Saudi Arabia, the long term disruption in oil production and exportation could really distort the balance in the world wide supply and demand of oil. At present, the demand in oil is increasing as more countries consume more oil as their standard of living increased. In China alone, where 11% of Libya’s oil is exported, there is a notable increase in the sale of cars last year.
Libya’s contribution in the oil market world wide may be considered minimal but the political and economic unrest could lead to global economic crisis. Our dependence to oil as source of energy is a big factor to this world crisis. Without alternative energy sources, we will always be affected by any disturbance in oil producing countries no matter how trivial the crisis is.