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Turmoil in OPEC nation drives oil prices up sharply

Libya doesn't sell a lot to the U.S., but the effects could stunt American job growth.

February 22, 2011|Neela Banerjee and Ronald D. White

WASHINGTON AND LOS ANGELES — World oil prices are rising sharply as violence spreads through Libya, the first major petroleum exporter to be threatened by unrest sweeping North Africa and the Mideast.

As fears mounted that soaring energy costs could derail the global economic recovery, the benchmark price of crude in London on Monday surged $5.48, or more than 5%, to $108.20 a barrel, its highest level since September 2008. The rise knocked European stock markets sharply lower.

U.S. oil prices also jumped, hitting $91.42 a barrel in electronic trading on a day when most U.S. financial markets were closed for the Presidents Day holiday. U.S. prices lately have been below the London price because the United States is less reliant than Europe on Middle Eastern oil. Also, U.S. crude inventories have been near record highs.

Still, the domestic price of oil has not consistently been this high in more than two years. Some analysts said further violence in Libya could push prices beyond the all-time high of $147.27 a barrel, set in July 2008.

Unlike Egypt, Tunisia and Bahrain, which are not major oil producers, Libya is a member of the Organization of the Petroleum Exporting Countries, or OPEC. The world's 12th-largest oil exporter, Libya sells most of its 1.8-million-barrel daily output to Europe. Citizen protests and the attempts by the government of Moammar Kadafi to suppress the demonstrations have begun to squeeze the country's oil production.

A German oil venture is suspending its daily production of 100,000 barrels, while other major oil companies have started to evacuate family members and non- essential employees from Libya. The Nafoora oil field in a prolific part of the country has been shut down by strikes, the Al Jazeera news network reported. A tribal leader in eastern Libya, home to several major fields, also told Al Jazeera that his tribe "would stop oil exports to Western countries" if the regime did not end its violent crackdown.

The regime's spokesman, Kadafi's son Seif Islam, said oil fields could be attacked by "thugs" if the protests go too far. "We will have a new Libya, new flag, new anthem," he said Sunday in a rambling, often combative speech that was the regime's attempt at compromise. "Or else, be ready to start a civil war and chaos and forget oil and petrol."

What's ahead

Analysts said Saudi Arabia, the world's largest oil exporter, probably would ramp up production to compensate for a drop in Libyan exports. But oil prices might continue their climb, given the traditional skittishness of oil markets. That would spur higher prices for gasoline, jet fuel and diesel, imposing a de facto tax on consumers and businesses and further slowing the sluggish global economic recovery.

Leila Benali, director for the Middle East and North Africa for the research group IHS CERA, said: "There is some spare capacity -- OPEC could partly step in -- but will the market take that into account?"

On Monday, the U.S. average price for a gallon of regular gasoline rose to $3.171, up from $3.126 a week earlier, according to the AAA Fuel Gauge Report. California's average gasoline price, the highest in the U.S. except for Hawaii and Alaska, rose to $3.561 a gallon, up more than 11 cents from last week's $3.450.

At the downtown Los Angeles Shell station on Olympic Boulevard at Grand Avenue, Mya Ross of Culver City uttered a profanity when she saw the $3.91-a-gallon price, even though her 2005 Toyota Corolla is thrifty in terms of fuel economy. She said she refuses to buy more than a few gallons at a time when prices are this high.

"I get so disgusted," said Ross, 23. "But it's kind of silly because it just means I stop at more gas stations and get angry all over again."

Libya plays no direct role in either the U.S. or California energy supply. The United States imports much of its oil from Canada, Mexico, Saudi Arabia and West Africa. But oil prices are global. Tighter supplies of Libyan oil to Europe would send refiners there scrambling to buy crude oil from whatever source they could find, driving up petroleum prices everywhere.

"This is a market that has very few suppliers, and it is concentrated in very unstable places," said Mark Cooper, director of research at the Consumer Federation of America in Washington.

Moreover, Libya exports "light sweet," or low-sulfur, crude, which is prized for gasoline production and could be hard to replace, even if the Saudis step in, said Edward Morse, head of commodities research for Credit Suisse.

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