A Libyan civil war—a possibility, though still currently avoidable—could materially impact global energy supplies and prices.
Libya has 41 billion barrels of proven crude oil reserves—the largest in Africa—representing 2-3% of global energy supplies.
The European periphery will face the greatest impact from any Libyan supply disruptions, though globally, widespread physical oil shortages are unlikely.
Oil prices have spiked recently in reaction, but oil prices are notoriously volatile and nothing's certain at this point.
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Like Egypt before it, and Tunisia before that, Libya is swept up in a civilian revolution to end the authoritarian regime currently in power. However, unlike Egypt or Tunisia, Libya is a member of the Organization of the Petroleum Exporting Countries (OPEC) and a major global oil producer. A Libyan civil war—a possibility, though still currently avoidable—could materially impact global energy supplies and prices.
Events took a turn for the worse this week as Libyan leader Muammar Gaddafi, clutching an umbrella to prove his relevance, refused to step down and pro-government forces escalated violence against anti-government protestors. As a result, international oil companies halted work in the country and started evacuating staff. Italian oil and gas company Eni suspended some of its Libyan production, including the Greenstream pipeline which runs from Libya to Sicily and provides Italy with roughly 10% of its natural gas needs. Spanish oil company Repsol also suspended its Libyan operations, and global politicians are calling for all international companies to do the same to condemn civilian attacks. All Libyan ports are now closed, though traders expect them to be reopened in two to three days.
The disruptions have reduced Libya's oil exports by about 100,000 barrels/day. So far, this is a drop in the bucket compared to the country's current rate of 1.6 million barrels/day (mb/d) of overall production—but if Gaddafi keeps his promise to fight to his "last drop of blood," that bucket may quickly be empty. Libya's export infrastructure is highly vulnerable to attack, so a civil war could cause oil production to plummet or be cut off entirely.
Libya has 41 billion barrels of proven crude oil reserves—the largest in Africa—representing 2%-3% of global energy supplies. The country is a major supplier of natural gas to Southern Europe. Indeed, the European periphery will face the greatest impact from any Libyan supply disruptions. Libya supplies 24% of Italian oil needs and 15% of its gas needs, and more than 10% of domestic oil demand in France, Portugal, Austria, and Ireland. A supply disruption likely raises fuel prices some globally, but consumers in these areas will likely bear the brunt until supplies are redirected from elsewhere, an additional painful burden for economies already facing problems.
However, globally, widespread physical oil shortages are unlikely. Many countries, like the US, have ample oil reserves to withstand temporary supply shocks. Additionally, OPEC still has about 3.2 mb/d operable spare capacity ex-Libya.* This means OPEC could increase production relatively quickly to offset Libyan production disruptions, though it would push the oil cartel's capacity utilization up to roughly 91% from presently 86% and reduce the world's ability to react quickly to any later major surprise disruptions.
Oil markets have seen prices spike recently in reaction to Libyan events and to potentially more disruptions to oil production in the area. But oil prices are notoriously volatile, and though OPEC capacity utilization should be a key determinant of global oil price (as it's broadly representative of the overall market balance), the relationship hasn't always held. This means oil prices could spike up further, but that can't be assumed.
Gaddafi's wild unpredictability makes it hard to handicap what events may follow. For all the uncertainty, however, it's hard to imagine a Libya without Gaddafi is anything but a long-term improvement for the Libyan people. For now, we can only carefully monitor the situation in Libya—as well as all over the Middle East—before having any knee-jerk reactions on what is still a fairly wide range of probabilities. Note, stock prices can, do, and have risen on higher oil prices. Radically higher prices, particularly if unexpected and sudden, can certainly impact stocks and the economy—but that's far from certain at this point.
*Sources: IEA, EIA, and Bloomberg. Excludes inoperable capacity in Venezuela, Iraq, and Nigeria.