Global markets didn’t pay much attention to uprisings in Tunisia and Egypt. But Libya has been a different story, where unrest has affected a large oil producer for the first time. The prospect of supply disruptions amid a collapse of the Gaddafi regime has propelled Brent oil to a two-and-a-half-year high.
A flight from risk saw the stockmarket in Italy slump. Italy is Libya’s biggest European trading partner – imports from the North African state cover a third of its oil demand. Equities across the world weakened and demand for safe havens climbed.
The problem isn’t just Libya
The price jump reflects fears that the oil supply squeeze could extend beyond Libya. As Andrew Peaple points out in The Wall Street Journal, world oil markets have enough stocks and capacity “to absorb even a full loss of Libyan output”. Output in Libya, Opec’s seventh-biggest producer, totals around 1.6 million barrels a day. So far, around 350,000 barrels a day of output have been lost. Saudi Arabia alone has 3.5 million barrels of spare capacity.
The real worry is contagion reaching Iran or Saudi Arabia, which together have production capacity of around 15 million barrels. Iran’s daily output is “too large even for Saudi to replace”, says Win Thin on Creditwritedowns.com. While most analysts don’t expect Saudi Arabia to succumb to civil unrest, we can “no longer take anything for granted”, says Peaple. After all, “a revolution in Libya seemed highly unlikely just two weeks ago”.
How oil affects the economy
A high oil price “is just what policy-makers don’t need as they grapple with the aftermath of the financial crisis”, says Jeremy Warner on Telegraph.co.uk. It is “inflationary and deflationary at the same time”. It adds to the case for higher interest rates to stem price rises, but also hampers corporate profits and consumption. So the net impact is negative for growth. Asia looks particularly vulnerable to the latest oil price rise, says Wayne Arnold on Breakingviews.
Its inflation is “already troubling” and it still “relies heavily on Arab oil for its energy-intensive growth”. The rest of the world has become less dependent on oil in recent years. It now only takes about 50% as much oil to produce a dollar’s worth of economic output in developed nations as it did in the 1970s. The International Energy Agency (IEA) has pointed out that its members – mostly Western countries – have emergency supplies of 1.6 billion barrels. That’s enough to cover daily imports of four million barrels for a year. Tapping these should temper price rises.
How high is too high?
But according to the IEA’s chief economist, Fatih Birol, oil prices are “already a serious risk” for the “fragile” global economic recovery. He noted recently that if prices remained above $90 in 2011, the EU would be spending 2.1% of its GDP on oil imports. That’s only a shade below the 2.2% seen in 2008, when the oil spike helped sink the world economy. The world as a whole, says the IEA, is heading towards spending 5% of GDP on oil, the same as in 2008.
Gauging the level of oil prices that would tip the developed world back into a downturn is not an exact science. A sudden spike is widely deemed more dangerous than a gradual increase as consumers suffer a sudden hit to their wallets. Deutsche Bank reckons that US prices of $95 to $100 are the danger level. Thereafter, a sustained $10 increase lowers GDP by 0.5% over two years. US futures may only be at $95 now, but average petrol prices are already only a whisker below their 2008 level, says Citywire’s Deborah Hyde. “Houston,” says Warner, “we have a problem.”