The Gaddafi effect on oil | FT Alphaville

The Gaddafi effect on oil

It looks like a potential Libyan regime change is already beginning to affect oil prices on Monday:

Brent crude price August 22

It’s only 2.2 per cent down at pixel time, and there are many other factors to consider in these economic times. But it’s a contrast to what we’ve seen in say, European equities on Monday morning, where major indices have moved a little higher.

However, it could be quite some time before Libya’s oil supply gets back to its pre-civil war levels of about 1m barrels per day. Just how long is anyone’s guess, but here are some factoids to get you started.

From the latest IEA monthly oil market report:

Operator ENI, which prior to the civil war produced 115 kb/d of crude, told shareholders in July that it would need at minimum a full year to restore production given the age of the fields in Libya once thepolitical situation was resolved. Other sources have been more optimistic, suggesting post‐hostilities resumption taking anything from a few weeks to six months.

Repsol YPF was similarly upbeat about resuming its Libyan production on its Q2 conference call on July 28:

So we are talking about weeks, two weeks, three weeks, four weeks maximum to start that production. Logically, you will have a ramp up, but we have all the people and all the teams ready to move into Libya once the conflict is solved. And the data we have today is that there has been no damage to the facilities.

Libya’s national oil company has also mentioned a similar timeframe.

But — there’s more than just equipment and staff to consider. Back to IEA report:

Meanwhile, at a gathering of business executives in London last month other companies said that internal political upheaval even once there was a formal end to hostilities would delay their return to the country on the grounds the investment risks were too high.

Saudi Arabia is probably hoping that is indeed the case. Having pumped with all its might to make up most of the Libyan shortfall, it’s now facing the  broader problem of softening demand, so a boost to supply is the last thing it needs. Like many of its fellow OPEC members, it needs a strong crude price to support high levels of per capita public spending, especially after that Arab Spring-themed boost. The kingdom was likely already contemplating swift action, if the assertions of Bernstein analyst Clinton Oswald  last week are anything to go by:

With the $36Bn of additional benefits (i.e. expenditures) announced in February by the Saudi King, our estimate of the break-even price would increase by circa $20/bbl to $85/bbl. As a result, we would feasibly expect to see Saudi exports start to decrease much sooner this time if a bear case was to materialize.

Well, the bulls are already in retreat due to that little matter of raging sovereign debt problems and recession worries. As Olivier Jakob of Petromatrix noted archly last week:

The oil bulls have scrapped China from their vocabulary, are not mentioning demand anymore, not really mentioning supply either and are down to making the case that oil needs to move higher to meet the budgetary objectives of OPEC countries.

And now they have to contend with Libya, too.

Lastly, for those looking for an oil price-related boost for an ailing global economy: James Hamilton has news for you:

One very well-established observation is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms. For example, when oil prices plunged in the mid-1980s, the oil-producing states in the U.S. experienced what looked like their own regional recession. An oil price increase that just reverses a recent price decrease does not seem to have the same economic effects as a price move that establishes new highs.

Related links:
Gaddafi regime collapsing – FT
Economic consequences of recent oil price changes – Econbrowser
FACTBOX: Libyan oil production: How quickly can it restart? – Reuters
Oil Prices Set to Slip if Rebels Win Libya – WSJ