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Libya’s Instability, Worries Over Regional Contagion Rattle Oil Markets

February 24, 2011 at 6:03 PM EDT
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Libya exports more than 1.5 million barrels of oil a day to the world, but violence has pushed oil prices to the highest level in more than two years. Judy Woodruff talks to Raad Alkadiri of PFC Energy, a global energy advisory group, and Carl Larry of Oil Outlooks and Opinions, a Houston-based research and consulting firm.
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JUDY WOODRUFF: And back to the Libya story and its impact on oil and gasoline.

Libya normally produces more than 1.5 million barrels of oil a day to the world. But the violence has disrupted some of that production and added new anxiety to international markets. Today, the price of oil hit its highest levels in two-and-a-half years, when crude oil futures broke $103 a barrel. It eventually dropped for the day, finishing just over $97 a barrel.

In the U.S., gasoline prices are following that general path upward. The average price today is $3.27 a gallon, up 25 cents from just a month ago.

Now, for more on all this, we check in with two people who follow the oil business closely. Raad Alkadiri is head of global risk at PFC Energy, which advises energy companies and countries around the globe. And Carl Larry is president of Oil Outlook and Opinion, a research and consulting firm in Houston.

Thank you both for being with us.

Start with you, Raad Alkadiri.

So, Libya exports we said one-and-a-half million barrels a day, what percentage of the oil output does that represent?

RAAD ALKADIRI, PFC Energy: It actually produces just over one-and-a-half million barrels a day, which is roughly 2 percent of global production of crude. Its exports are about 1.2 million barrels a day, so not insignificant.

And I think, you know, at a time when you have uncertainty in the market, at a time when what’s going on in the Middle East has spooked traders, has spooked the market, suddenly seeing actual supply disruptions, potentially, of around half-a-million barrels a day becomes very significant.

JUDY WOODRUFF: Even if it’s just 2 percent.

Now, has all of that production been shut down?

RAAD ALKADIRI: Not all of it has been shut down. And obviously, it’s still sketchy as to what exactly has been shut down, but it seems that the production that’s actually managed by foreign companies who’ve moved out their personnel and where force majeure has been declared. It’s that production, about half-a-million barrels a day, that’s actually been shut in.

What’s uncertain is how much of the rest of the production that is managed by the Libyan national oil company is actually being disrupted, not by violence or not by attacks on the fields, et cetera, but just by the general chaos that’s sweeping Libya.

JUDY WOODRUFF: Carl Larry, who are the customers for Libya’s oil? Who’s affected by this?

CARL LARRY, Oil Outlooks and Opinions: a Well, I think most of the oil that we’re seeing leave Libya is going to head to Europe and Asia. There’s a small amount comes to the U.S., but it’s not significant to cause any kind of major spikes that we have seen in the past few days here on the — on the futures market in America.

But I think it’s enough that people — it’s enough to make people worry. And the instability in the whole region is, I think, what people are focusing on right now.

JUDY WOODRUFF: So, how much of it — to the point that we just heard from Mr. Alkadiri, how much of this is specifically because of the violence in Libya, the disruption there, and how much of it is just this general nervousness?

CARL LARRY: I think — I want to say that probably the majority of it is the nervousness of the contagion that’s going on in that area. It’s not just Libya. It’s the military rule in Egypt right now.

And if Libya does lose Gadhafi, we don’t know how or who is going to be operating that country. So, if it goes on past that, that’s another thing we’re going to have to worry about. This is not a premium that’s just going to go away just on fear. This is something we’re going to have to live with going on going forward.

JUDY WOODRUFF: Can you break it down, Raad Alkadiri, country by country? I mean, how much of the — the anxiety is over Saudi Arabia or Bahrain or Iran or some of the other countries in the region in North Africa and in the Middle East?

RAAD ALKADIRI: I think whenever you have instability in the Middle East, even when it doesn’t directly impact oil production, what you see is the markets get spooked. They’re always worried about some sort of contagion effect.

Obviously, what’s going on in the Middle East right now is very new. It’s very unsettling. And it seems to be sweeping across the region. What people worry about, ultimately, is Saudi Arabia. You know, Libyan disruptions are important. And the fact that you have physical disruptions, as opposed to just the fear of physical disruption, is an important additional factor in driving the psychology of the market and driving prices upwards.

But ultimately, it’s that worry that, somehow, as this disruption spreads, it’s going to hit some of the larger producers, and the mother lode of that is Saudi Arabia.

JUDY WOODRUFF: And Saudi Arabia being, what, the world’s second largest producer?

RAAD ALKADIRI: Second-largest producer after Russia and the world’s largest exporter.

JUDY WOODRUFF: And the world’s largest exporter.

Help — help us understand, Carl Larry, the effect on gasoline prices here in the United States. For people who are watching who are saying, all right, that’s all interesting, how is it going to affect and will it continue to affect the price of gas and diesel here in the U.S.?

CARL LARRY: Well in an overall picture, I think the oil prices are one thing that generates a higher price for gasoline.

But, at the bottom baseline of it all, the supply for gasoline here in the U.S. is actually near record levels. And our demand right now for gasoline is not that high. If we look back to 2008, it’s a whole different picture. Back then, the demand was record highs. Supplies were running low, and refinery production was actually struggling to keep up.

So, it’s a different scenario here. We will see gasoline prices follow the higher price in crude oil, but I don’t think we are going to see spikes, like we saw in prior years. So, that’s the key to keeping the economy on a steady growth pattern. We can handle small rises in oil prices, but major spikes, especially for a prolonged period, are what’s going to be detrimental.

JUDY WOODRUFF: One of — both of you said at the outset, I think, that much of the Libyan oil goes to Europe, goes to Asia. So what about the effect on the world economy and then how that ripples, how the effect of that touches the United States?

RAAD ALKADIRI: I really think there are two different issues that need to be considered.

One is the disruption itself. And the Saudis have stepped in today and said that they will fill in for the lost supply. And this is really the essence of the Saudi’s geopolitical role. They’re the central bank of oil. They’re there to provide liquidity when the market needs it. And they have roughly the same type of oil. It’s a light sour, rather than a light sweet, but in terms of European refineries, it can handle that kind of crude.

Ultimately, it’s going to be the combination of how nervous the markets are, how much disruption there is in the Middle East, and ultimately what it does to prices. I think if prices do stay high, it will begin to start to have a drag effect, particularly on some of the economies of Asia, probably less so on the U.S. economy.

And in Europe, it’s particularly Italy that’s going to be affected by this. But overall, as Brent prices, which is the marker in Europe, get driven up — they’re much higher than the WTI price in United States – that is going to start to have an impact on disposable income.

JUDY WOODRUFF: So, Carl Larry, if this situation in Libya doesn’t get resolved over the next days or weeks — I mean, let me turn that around and ask how long can this go on before we see a significant worsening of — of the oil picture?

CARL LARRY: Well again, you know, we spoke about this earlier. As the — you know, as more unrest continues to grow in the region, that’s going to keep prices higher.

If we see this continue over to the next couple weeks, obviously, we’re not seeing any kind of resolution in that Middle East. And that’s what’s really going to cause prices to continue higher, and even see higher spikes. But I think the one thing that’s really interesting right now is that, for years, the U.S. has been the leader in oil consumption and driving oil price. This one time, particularly, we’re following.

And just like he had said, we’re — we’re watching Europe and watching Asia. And if their economies start to slow, the prices will start to deteriorate. But, right now, we’re following that Brent, and we’re following the price spikes over there.

JUDY WOODRUFF: So, is — is the — is the bottom line here that there’s some kind of cushion for the United States?

RAAD ALKADIRI: I think there is a cushion. There’s a cushion in terms of supply. And ultimately, in terms of the overall market, there’s a cushion that’s going to be provided by Saudi Arabia.

Saudi Arabia has four million barrels a day, over five million barrels a day of spare capacity that exists within OPEC. It is there for precisely this reason. It is to step in and to fill in any gap. The danger and the worry in the market will be is if the unrest continues and if it spreads closer and closer to Saudi Arabia. That will create nervousness.

But as yet, the Saudis look to be able to do what they have pledged to do.

JUDY WOODRUFF: Raad Alkadiri and Carl Larry, thank you both.

RAAD ALKADIRI: Thank you.

CARL LARRY: Thank you.