Oil Prices: If This Happens, We Could See a Super Spike in Oil Prices

Oil PricesThis Could Send Oil Prices Soaring

Libya, a member of the Organization of the Petroleum Exporting Countries (OPEC), supports freezing oil production increases. Last week, Saudi Arabia and Russia, along with other OPEC members, agreed not to raise oil output to stabilize prices. But, Libya would like to increase the output when market conditions allow. There had been talk that Libyan oil production would further boost the world output, putting more pressure on prices. Nevertheless, even as Libya remains a disaster, it won’t be affecting oil prices at all in the near -term. The country remains too unstable for any meaningful production increase to occur.

Libya has lost tens of billions of revenues since the collapse of the Qadhafi regime in 2011. Libya’s oil company, the National Oil Corporation (NOC) has lost operating plants and ports. Oil production has plummeted to 362,000 barrels per day, or about 20% of what it was in 2011.

Libya remains divided between two governments, which are fighting for what remains of the oil revenues. A Libyan militia, one of hundreds that have mushroomed in the country since it was “liberated”—no thanks to NATO forces—controls some oil-producing facilities.

Islamic State (IS), which has been moving into Libyan territory with increasing intensity over the past months, has advanced from its stronghold in Sirte to the eastern oil areas of Libya. Unlike Syria, where IS smuggles oil, presumably selling it through Turkey, to finance its operations, Islamic State has destroyed oil facilities in Libya. It understands that it cannot exploit Libyan oil for commercial interests as in Syria. Therefore, IS destroys facilities to create economic problems, preventing national reconciliation and maintaining the state of anarchy that allows it to expand there.

Libya is facing lawlessness, civil war, tribalism, and the appetites of Islamist terrorism. It is in the midst of an epochal crisis that might be likened to Somalia on steroids. However, Libya also floats on a sea of high-quality, sweet crude oil. Italy’s Eni, for years the largest foreign oil company in Libya, a former Italian colony, still manages to exploit the country’s oil wells. Eni has been able to maintain a dominant role in the country thanks to the “protection” of different militias and tribes. Other companies, such as France’s Total, Spain’s Repsol, and America’s Marathon Oil, have left their activities because of the deteriorating situation.

In recent weeks, the situation for Eni has become more dangerous due to clashes between forces loyal to the two governments and ever-increasing attacks by armed men linked to IS. The latter wants to block the oil trade. Sirte, Islamic State’s stronghold, is near important oil facilities. Sabratha, where the U.S. launched an attack against IS fighters on February 19, is a key location for the control of oil installations in western Libya. Sabratha appears to be a new nerve center for Islamic State.

Libya reflects the tectonic shift in how oil risk plays out today. Forty years ago, Saudi Arabia placed an oil embargo on the United States and its European allies. The oil-producing Arabs of the Gulf retaliated for the West’s backing of Israel in the Yom Kippur war of 1973. This created a frightening oil shortage, which sent oil prices into a steep rise.

OPEC invented the oil weapon: limiting oil production to raise prices, often countering Western interests and regulating regional disputes.

Today, the opposite is true. Instead of raising prices, geopolitical tensions and Saudi interventions are targeting an oil price collapse. Saudi Arabia is the main actor, flooding the market, rather than cutting production. In the process, it is also hurting itself, because it must increase public debt. Likewise, it hurts all countries that live on oil exports, such as Iraq, Algeria, Venezuela, Nigeria, Angola, and, of course, Libya.

Today, as in 1973, the Saudis have a foreign policy goal. Now Russia is the target. Russia is Iran’s ally and it is intervening in favor of President al-Assad in Syria. The low oil price adds to international sanctions over Ukraine and puts Russia in serious difficulty. But Russia will not withdraw and the United States, while uttering the occasional complaint, does not mind Russia posing a major challenge to Islamic State’s dominance in northern Syria. Eventually, Saudi Arabia will have to give in to the pressure and allow OPEC to make more meaningful production cuts to allow oil prices to rise more substantially.

Even if this should happen in the next few months, rather than weeks, Libya is far from affecting oil prices.