Oil Prices Reflect Fears Unrest Will Spread

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The turmoil in Libya sent oil prices sharply higher around the world Tuesday. In New York, prices reached a 2 1/2-year high of nearly $94 a barrel. That, in turn, sent stock prices down, with the Dow Jones industrial average tumbling 178 points.

The spike in oil prices reflects fears that the political turmoil could spread to Gulf countries that produce a lot of oil.

A Growing Demand For Oil

After the 1988 bombing of Pan Am Flight 1903 over Lockerbie, Scotland, the United States imposed economic sanctions on Libya. For many years, U.S. companies were barred from doing business in the country. Once the sanctions were lifted, companies including Marathon Petroleum and Exxon Mobil rushed to take a piece of Libya's huge oil reserves.

Energy analyst Fadel Gheit of Oppenheimer & Co. notes that the companies had to pay dearly to do business with Moammar Gadhafi's regime.

"Gadhafi and his cronies put this money in their bank accounts and obviously that's why the people are rioting — because they don't see anything trickling down to them," Gheit says.

Partly as a result of the sanctions, Libya's oil industry hasn't developed as fast as it could, according to Gheit. It produces about 1.8 million barrels of oil a day, about 2 percent of the world's output. And even if Libya stopped producing oil altogether, there's enough spare capacity in other countries like Saudi Arabia to make up for the loss.

But the unrest in Libya has sent a shiver through the oil market. Gheit says with the world economy recovering, there's a growing demand for oil.

"In a tight market for whatever reason, any perception of supply disruption will have an impact on price," he says.

'An Accumulation Of Situations'

Gheit says the sheer lack of reliable information coming out of Libya has made the markets especially nervous. Gadhafi's decision to declare force majeure over its oil contracts Tuesday was another worrisome sign. It allows the regime to break any contracts it has signed with oil companies.

"It usually indicates there are deeper troubles, so I think many people are watching now to see what is the reason for this and what does it mean for Libyan exports into the marketplace," says David Pumphrey, an oil expert at the Center for Strategic and International Studies.

But what's really scaring the markets, he says, is what the Libyan unrest says about the region as a whole. The first two countries to be swept up in the unrest — Tunisia and Egypt — weren't big players in the energy business and the markets could shrug off their impact. Since then, the violence has spread to Bahrain and now Libya, he notes.

"We're beginning to see an accumulation of situations," Pumphrey says. "Individually none of them should be a problem. Taken together, I think it causes more concern, especially if there is a risk that some of this spreads to the really big producers in the Gulf states."

The real fear is that the turmoil could extend to Saudi Arabia, the region's biggest oil supplier by far. In that case, the increases in oil prices that the world has seen so far will seem small by comparison.



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