Why Libya's Uprising Is Bad for the World Economy

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Sergei Grits / AP

Even before its outcome is known, Libya's uprising could leave an indelible mark on the world economy: oil prices have rocketed since Tuesday and could rise even further amid the continuing turmoil that has prompted thousands of foreign oil workers to flee. Libya's oil output, typically 1.7 million barrels a day, has fallen by more than half since Tuesday, and its energy exports have ground to a complete halt. Worse news still for global oil markets is that there is no knowing when those skilled expatriates whose presence is crucial to the operations of Libya's energy industry might return. "There is huge uncertainty about what the future of Libya is going to look like," says Julian Lee, analyst for the Center for Global Energy Studies in London. "Companies have very large, lucrative contracts in Libya, which they don't want to damage."

The chaotic civil war that has put much of eastern Libya in rebel hands has left the country's oil and gas facilities spread across rival zones of control. In Gaddafi-controlled western Libya lie the large export terminal and refinery outside Tripoli, and the Greenstream pipeline that carries natural gas from the Sahara field of Wafa to the Mediterranean ports, where it's shipped to Italy, which gets 25% of all its oil and about 15% of its natural gas from Libya. But rebel forces have control over the critical export terminals of Tobruk and Zuetina, which ship oil and gas from pipelines originating deep in the Sahara. Now, says Lee, "Oil companies are not sure who they are dealing with in areas which are out of Gaddafi's control."

Oil futures in London on Thursday reached nearly $120 a barrel, while the U.S. benchmark index was above $100 — the highest rates since the global financial meltdown of September 2008. And two major fears threaten to drive prices still higher: The first is that Libya's output may be lost to world markets for some time. Officials in Saudi Arabia have told European oil companies that the kingdom will make up supplies lost from Libya, by shipping additional barrels through the Red Sea. They've also arranged for West African countries to divert oil bound for Asia to Europe instead, agreeing to replace the Asia-bound shipments themselves. But Libya's high-quality, low-sulfur oil is not that easily replaced by the sulphur-heavy Saudi oil, particularly in Europe, which is short of refineries. Indeed, the immediate boost needed to keep supplies steady would be more likely to come from the strategic reserves of the U.S., Europe and Japan, all of which keep 90 days' supply in stock to deal with dire emergencies.

The second anxiety gripping oil markets extends beyond this week's turmoil: there's a growing sense that the Middle East region, which has the planet's biggest oil reserves, has been made deeply unstable by the revolutions in Tunisia and Egypt, and the uprisings in Libya, Bahrain and Yemen. Says Amrita Sen, an oil analyst for Barclays Capital in London: "The question now is, Who is next, Algeria?" Algeria, a major oil producer bordering Tunisia and Libya, has long been viewed by North Africa watchers as ripe for revolution, having been ruled by autocrats since the military canceled elections in 1991. Oil companies, which sign long-term production and revenue-sharing contracts with governments, have been shaken by the political uncertainty sweeping the region. They're asking, says Sen, "Who are we going to deal with? Who is going to come to power?" That uncertainty pushes up prices, which in turn slows the global economic recovery.