Understanding the Implications of Libya

Two good recent articles on the implications for oil prices and production of the situation in Libya. First, Tom Whipple's always cogent overall analysis:

While the 1.6 million barrels a day (b/d) that the Libyans pumped in January may not appear significant in a world that produces some 88 million barrels each day, we should remember that those barrels are being consumed somewhere in a world where they are consumed just as fast as they are produced. If there is anything that we have learned in the last 40 years, it is that relatively small disruptions in oil production can lead to relatively large increases in oil prices.

OPEC, the International Energy Agency, and the Saudi oil minister are already rushing to reassure us that we have nothing to fear. The OECD has reserve stockpiles totaling 1.6 billion barrels of oil and OPEC is forever reminding us about the six million b/d of spare oil production capacity that they claim can be turned on as soon as it becomes necessary. This of course would be nice if the upheaval in Libya was going to be the only problem, but it isn't. There are at least half a dozen major Middle East oil exporters with large numbers of digitally-connected underemployed youths and are run by heredity or less-than-democratic corrupt governments. In recent days we have seen flavors of the "Tunisian contagion" erupt in Algeria, Kuwait, Iran, and Iraq which are indeed very significant oil exporters. The upheaval in Bahrain, not a major exporter, has even had a, so far minor, reflection in the Shiite portions of Saudi Arabia with its 8 and maybe 10 or 12 million b/d of oil production. This week the King of Saudi Arabia announced $35 billion worth of government aid to the poorest of his subjects suggesting that someone in Riyadh is getting nervous.

The conditions that created the current upheavals can only worsen. Rising oil prices are bound to stifle tourism and foreign investment in the Middle East and a looming global food shortage seems likely to make life even tougher for the growing ranks of un- or underemployed poor. Governments that have massive oil revenues can afford to buy, or try to buy, the acquiescence of their peoples, but adequate food supplies could turn out to be a different matter. As we saw with Russia last summer, massive crop failures can easily shut down food exports as governments become more concerned about domestic food riots than the wellbeing of other countries. The bottom line is that it seems likely we shall be seeing disruptions, perhaps serious ones, in other oil producing states in the not too distant future.

Next, Stuart Staniford sorts through the confusion, offering, as always, clarity in a blurry picture, and a useful summary of what's going on.

With Chinese demand higher than expected, and other Middle Eastern nations shifting as well, there's plenty of reason to believe that the world oil picture might be very unstable indeed. It is worth noting that the 70s oil shocks came about after about a 5% reduction in imports - oil shocks credited with causing nearly a decade of economic crisis.

No one knows what the future will bring - but what this should point out is that in the 13 years that peak oil analysts have been calling on governments to prepare for oil supply crises - crises that are both a logical outcome of political situations and a logical outcome of a world where demand and supply are running very close, no one has paid enough attention. We have to ask ourselves - if we had listened to Colin Campbell and the rest of those raising the alarm in 1998, where would we be now? And where will be in 10 years if we don't act now to respond?

Sharon

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One may add that Saudi Arabia's grain production is about to collapse since they are running out of water. This may not be significant on a global scale, but may have social repercussions in the country.

Saudi Arabia announced it was phasing out wheat production a few years ago, so this is largely expected, and Saudi Arabia has been a major new landowner in the global land grab for grain-growing land. But yes, it is a factor because Saudi Arabia absolutely needs to be able to buy grain on the world markets - as does China and several other major nations with deep pockets. So what happens when the entire Canadian Wheat harvest, say, is needed on the marketplace?

Sharon

You paint a grim picture, Sharon. If China and other major nations are bidding up the price of wheat and other grains - what does that mean for the poor and those in less affluent countries?

Kennedy's adventure to put a man on the moon, that happened in what? seven years? That built on technology already in development, and McNamara's predecessor to today's big government 'Federal Acquisition Regulations' hadn't really kicked in yet. Today the government cannot do anything without first creating a new bureaucracy (to assure that all hindrances and regulations are observed, with added costs rolled into the expected program over-runs). What won WWII was the ability of contractors to talk to the military, and come back with a plane or ship, and say, "What do you think?" "We'll take a thousand!". That point takes at least three years (20 years ago anyway, the standard for projects required that there be a three year minimum, so an officer assigned to the project would have been rotated to a new assignment, and wouldn't be blamed for a project that failed.)

I don't think starting in 1998 government would have accomplished much, nor allowed industry to accomplish much, either. My fear is that with the weak economy threatening national security, and the rising tide of violence (with food prices and oil prices), that we may not be able to depend on the government to keep hostile forces out of our back yards.

http://bradsworldview.blogspot.com/2011/02/sharons-grim-picture.html

I traveled to my house in Maine this past week to get some things done up there and when I arrived in Houlton, gas was $3.20ish a gallon. When I went into town Tues. it had gone to $3.24 and when I pulled in to fill up Thurs. for the ride home it was $3.39 and $3.49 at two of the major stations near the beginning of I-95. I have no Internet connection at this house-in-progress nor TV, so I was only slightly aware of what was going on in Libya (via 5 minute radio news shows while toiling away, hauling junk out of the basement, etc.)

It looks like the world is going to make me chose between living in MA and the house in Maine pretty quickly as driving regularly between the two is economically out of the question. (It become morally questionable some time ago.)

I also ordered 150 gallons of heating oil for the Maine house, unaware of Libya stirrings and almost passed out when the delivery guy handed me the delivery invoice of over $500. Happily, the plumbing gets blown out and the heat totally shut off when we're gone away so this oil purchase can probably last into next fall and winter as we're planning on getting some serious insulation and wood stove work done this summer, but WOW! This world oil situation could really fall totally apart here and now.

I can see that I might not make the Maine move all that fast and might have to be content with having the house unheated and winterized while the neighbor next door continues to lease my fields for now. At least down here in MA gasoline use is optional given my 1.5 mile commute.

May we live in interesting times indeed!

By Stephen B. (not verified) on 24 Feb 2011 #permalink

Uh, but it's UnAmerican to reduce your oil consumption, I mean, that's why there's no such thing as Global Warming and if there is it's nothing to do with us and and it's the sun anyway and I've got shares in Texaco and ....

I only ask whether our relationship with Iraq is so good that we could rely on the oil reserves of this country if other countries of the region refuse to sell oil to the US.