Last week in Libya, embattled leader Muammar al Gadhafi threatened to attack his countries oil pipelines if they fell into the hands of the Opposition forces. While an attack never materialized, Libyan production fell to less than 50% as foreign workers fled the country and the major port cities were overtaken by protestors. In a ripple effect, gas prices rose in the U.S. as a result of continuing protests in major oil producing nations. Prices in South Carolina rose from around $3.00 to over $3.25. Nationally, prices at the pump topped $3.75 in California and hovered around $3.50 in major metropolitan areas. As cash strapped consumers struggle with already difficult economic times, many are questioning why, if the US only receives 2% or less of its domestic supply from Libya, do prices react so negatively?
The answer is less complicated than it would seem, the price of goods in the international market is determined by a price that the buyer deems is a fair purchase and the seller determines is worth the costs of making/selling that product. In relation to the oil market, the cost of this commodity is determined by some sellers who physically possess the oil, nation states like Saudi Arabia, Venezuela, Libya etc and their middlemen like BP, Exxon and Shell who go and extract, refine and sell the product itself. A third party in this equation is played by the role of the speculator. A speculator is someone who buys and trades on the future price, or “futures” of oil. They depend on the assumption that oil prices will rise in order to make a profit, however sometimes this can cause a glut in the market, which will cause oil prices in fall drastically.( Source:MSNBC)
According to John Schoen of MSNBC however, the role of speculator and the Futures market is a healthy force in the market “Without a global futures market, you would see even bigger, more frequent price spikes and crashes. Companies couldn’t protect themselves from higher prices by locking in delivery well into the future. Producers couldn’t invest in expanding production with any confidence they’d get back that investment. History is littered with painful commodity booms and busts that happened before modern futures markets were set up. So the “premium” we all pay to the investors who buy and sell purely for profit is the cost of the market mechanism that brings some order to pricing. It’s money well spent.”
As far as American foreign policy is concerned, there is little direct interest in Libya from a commercial standpoint. While Libyan crude is high grade( known as “light, sweet), Libya supplies primarily Western Europe. There are regional concerns that are more subtle however. Saudi Arabia has pledged to make up for Libya’s loss of production, but John Kerr, futures analyst remains skeptical “While the Saudis have pledged to pump more to fill the gap, they may be making a promise they simply cannot keep,” he said. “They have their own worries right now too, and need to focus on keeping their own people happy or face the same potential fate as leaders in Libya, Yemen, Tunisia and Egypt.” While almost all Arab states are seeing protests, So far disruptions in oil production has only been affected in Libya and Bahrain. Bahrain is the base of the United States’ Fifth Fleet, which is responsible for the Persian Gulf and more importantly, safeguards the sea lanes for oil transport. In North Africa, Algeria is a key oil supplier to the United States and it so far has quelled dissent by ending nearly 19 years of emergency powers held by the military. But signs of discontent continue to grow and with the recent events in Tunisia, Libya and Egypt, one wonders how long the regime can hold out.
As for the prices at the pump, consumers will have to wait until things calm down for a break. Crude oil closed on March 2nd, trading at $102 a barrel and expectations are that continued instability will mean a skittish market and potentially higher prices.