A fact of life

• The unrest in Libya, a country contributing for around 2 %ⁱ,ⁱⁱ of the world oil, led to a cut by two thirdsⁱⁱⁱ of its production. Given that the country exports approximately 90%^iv,^v of its output, the cut counts for a reduction of roughly 1.2 % of the world total. The export is additionally limited by blocked or damaged distribution infrastructure. As a result, the real-life decrease of the international supply induced by the developments in Libya goes even beyond 1.2 %.

• A gas production of approximately 85 million cubic meters per day is also considered at risk^vi. Normally, around 60 % of it would be exported.^vii

The reduced supply is by itself a source of pressure over the prices to go up. Despite the increased production in countries such as Saudi Arabia, Venezuela, Angola, Kuwait and the UAE^viii the expected increase became a fact of life.

There is no shortcut back

The reduced export is caused by:

• evacuation of stuff^ix;

• burning of production facilities^x;

• blocked^xi or damaged distribution infrastructure^xii,^xiii;

While the staff can be relatively quickly brought back to work and the blockages removed, the reconstruction of damaged facilities and transport infrastructure will take time. Even if the situation is resolved within the next few days^xiv, as promised by responsible representatives of the coalition powers, a quick restoration of the pre-conflict production should not be expected anyways.

The extremes are still to come

Many importers of Libyan crude have shut down their refineries for annual maintenance^xv which results in reduction of the demand. As April approaches, the global crude demand is expected to rise by around a million barrels a day as the Atlantic Basin refinery will start working again^xvi. Therefore, there are reasons to expect that the increasing demand will trigger a new pick of the prices as soon as the “maintenance season” is over.

Moreover, a talk for international sanctions against Libya is already on the agenda too^xvii.

The Electricity is not insolated

Provided that around 60% of the electricity worldwide is produced by combustible fuels^xviii, the electricity sector is inevitably tied to the dynamics of the fossil fuel markets. In Europe, the figures might be somewhat different but still more than 25% of the electricity is produced by natural gas and oil^xix.

What if governments come to play?

The increased prices of energy will cause a general increase of the prices of all goods and services. If the increase is too severe some governments and central banks may raise the base rates^xx in attempt to limit the inflation. If not properly dozed, combined with the seasonal fluctuations of the energy consumption in the Northern hemisphere, such a policy may cause a serious recession on the energy markets in the summer to come.

The vulnerability of the European markets

While the whole world suffers the shock from the increased international prices, the European market is a lot more vulnerable also to non-price shocks (such as disturbed deliveries) as Europe is a destination for over 70 % of the Libyan export of oil^xxi.

The European electricity market is more dependent upon the deliveries of gas rather than upon those of oil as more than 20 % of the electricity in Europe is produced by gas compared to only about 3 % produced by oil^xxii. The Libyan gas comes to Europe via the Greenstream pipeline to Italy, and to Spain in the form of liquefied natural gas.^xxiii

Among others, Greece is a significant channel for import of stress in the regional markets of South East Europe as around 15 % of the country’s oil import comes from the Jamahiriya^xxiv. The possible stress, however, is not necessarily a bad thing for all as it can be regarded as an opportunity for neighbors which are less reliant upon Libyan deliveries to gain momentum.

How long will be long enough?

The most recent developments¹ gave signals that the international community is not as united as it seemed when Resolution 1973 was adopted by the UN Security council. Muammar Gaddafi, on his part, avoids direct clash with the coalition powers. Instead, the colonel preserves his potential for a later stage, and he seemingly prepares his supporters for long lasting fights. Some speculations about a land invasion in Libya also appeared.

Such signals indicate that the normalization of the situation will take longer that publicly declared, and a positive outcome can be expected in months and years rather than in days.

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