Even those of us who have warned all along of the dangers of depending on foreign crude have been watching Libya with astonishment this week, seeing how swiftly a seemingly stable situation can unravel. While the recent unrest in Egypt that led to the ousting of President Mubarak sparked concerns about the safe transport of oil through the region, what we are now seeing in Libya is potentially far more devastating. For one thing, Libya has the largest proven oil reserves in Africa. And, the speed with which unrest is now spreading from one Mideast country to another is raising questions about the ability of other oil exporters to offset any production disruptions in Libya.
There is a new sense throughout the Middle East that stability is an illusion and that the political tensions we once viewed as distant, somewhat abstract threats, are upon us. That’s probably why oil prices are continuing to rise, even after Saudi oil officials moved to quell fears by stressing that it and other major producers had the capacity to offset any production lost in Libya. Indeed, while Saudi Arabia was stating that it had spare capacity, oil prices were moving higher amid concerns that Saudi Arabia could be the next site of an uprising. One energy security specialist explained it this way:
If they want (freedom) in Libya, which has a GDP-per-capita of around $12,000, why shouldn’t they want the same in Saudi Arabia, whose income per head is only slightly higher at $14,000 a year?
Already, Brent crude oil prices have moved above $105 a barrel while here in the U.S., average gasoline prices are at a two year high and approaching levels seen during the summer of 2007. They likely have not yet peaked. Standard & Poor’s Chief Economist David Wyss said that supply disruptions from Saudi Arabia or Iran would likely send oil prices to $200 a barrel, well above the $148 per barrel seen back in 2007. Economists understand how devastating such prices would be for the U.S. economy and have cautioned that such a sudden sharp price rise to $150 or higher would inevitably lead us back to recession. Investors are concerned as well. Stock prices fell sharply on Tuesday as the world watched Libya.
We will continue watching with hope for the best possible outcome for the people of Libya. The United States should be able to confront oppressive dictators who harm their own people without having to consider the impact to oil markets and the economy.