Libyan Conflict and Regional Uncertainty Drive up Oil Prices

Starting with Tunisia and Egypt in early 2011, opposition movements have grown across the Middle East and North Africa (MENA). Libya became the next country to develop a mass opposition movement, and the first major oil producer.

The subsequent conflict in Libya and rise in oil prices has been based more upon uncertainty over future political stability in the region than the actual decline in Libyan production. If this ‘uncertainty premium’ remains in place – notwithstanding NATO intervention in Libya – this will impact on consumers, businesses and the economic recovery worldwide.

Key points

  • Oil prices were already increasing prior to the recent turmoil in MENA, largely due to increased demand from China and other developing countries, as well as the renewed appetite for energy among OECD countries recovering from the 2008-2009 global economic crisis. Turmoil in Libya, Egypt, Tunisia and Yemen pushed oil prices over US$100 per barrel from February to April 2011 as a result of an ‘uncertainty premium’;
  • Libya produced 1.6 million barrels per day of crude oil in 2010. This amounted to 2.0% of global oil production at the end of 2009 according to BP, making Libya the 18th largest producer in the world;
  • Rising oil prices have lifted consumer price indices (CPI) in key countries such as the USA and China over 2010-2011, as the Europe Brent crude spot price for oil hit a 2-year high of US$114.50 per barrel in March 2011. China’s inflation grew 4.9% that month over the previous year, while in the USA it was up 2.1% in that period;
  • Real annual disposable income in Western Europe fell 8.2% in 2008-2009 and continued to drop at a rate of 2.4% in 2009-2010. If oil prices remain high, this will continue to reduce the spending power of consumers and limit future real growth in annual disposable income. This would reduce overall consumer expenditure and seriously impact the profitability of companies that sell consumer goods and services.

Prospects

  • Lower consumer spending will slow the economic recovery. Worldwide consumer expenditure dropped 5.6% in real terms in 2009, before gaining 3.3% in 2010 and helping to drive the economic recovery as real GDP growth rose from -0.5% in 2009 to 4.8% in 2010. Real GDP growth is projected at 4.4% in 2011;
  • Rising oil prices will reduce real disposable income in emerging economies where food and energy make up a large portion of consumer expenditure. Advanced energy-importing economies would also face a lowering of discretionary spending potential;
  • Accelerated inflation could lead to lower economic growth and the potential of a ‘double-dip’ recession in some of the world’s largest economies. Inflation is forecast to rise in the USA from 1.6% in 2010 to 2.3% in 2011;
  • The effect that the conflict in Libya will have on oil prices in the long term remains to be seen. If a stable government emerges that has the ability to repair the damaged infrastructure and regain the trust of foreign governments and companies, then their contribution to worldwide oil production may return to pre-conflict levels. However, if protests in other major oil producers such as Saudi Arabia and Iran develop, this will cause an even greater rise in oil prices in line with a growing uncertainty over the political future of the region. Many governments may accelerate reducing their oil dependence and look towards alternative sources of energy, which will provide business opportunities in the renewable energy sector.
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