Since the conflict in Libya really started to get messy, oil prices have risen steeply—from about $103 in mid-February to $123 a barrel last week. Given the country’s drop off in production (it represents about 2 percent of the world’s crude), the vote for separation of South Sudan (an oil producer) and the violence that has come from that, the continuing declines in oil production in Mexico and Venezuela, and the strikes and other problems in Gabon, Yemen, Oman, Ivory Coast, and Nigeria, the rise in price seems somewhat justified. What’s more, it’s not just actual events that affect oil prices, but potential events and senses of risk—and with all that’s been happening in the Middle East and elsewhere, oil markets are extremely jittery.
Less talked about, however, are the numerous factors that have been pushing oil prices down from what they otherwise might have been. The dampening of demand as a result of the multiple crisis in Japan, a sophisticated logistics chain that has allowed for the redirection of ships, and significant oil reserves in Europe have all conspired to offset the rising cost of crude. But, come summer, look for many of these mitigating factors to disappear and the crises in Libya and elsewhere to wreak their full effect on world oil markets.
Even as events in Libya and elsewhere put pressure on world oil prices, Japan’s deadly earthquake, tsunami, and nuclear crises sent a big downward demand shock through the market. What’s more, the sophisticated logistics chains of the international oil industry performed admirably: Tankers and pipeline supplies were redirected to meet the shifting demands of the market. Some of the oil tankers heading to Japan, for example, were diverted to other places as Japan’s demand weakened.
In addition, significant oil reserves in countries that imported close to or above 20 percent of their oil from Libya—Italy, Ireland, Austria, Switzerland, and France—helped buffer the initial shock. These reserves, thankfully, proved to be many times these countries’ daily imports from Libya, providing local markets and supply chains with ample leeway to adjust. In addition, oil markets were lucky because a number of refineries in the EU and the US happened to be in maintenance as the Libyan crisis unfolded and were demanding less oil as a result.
Finally, it’s a fair conjecture that if the global oil markets didn’t enjoy any excess capacity, the price of oil would have shot far higher. As it happened, however, oil producing countries like Saudi Arabia had plenty of capacity to spare, so the pressure on prices never got as bad as it could have been.
As summer approaches, however, look for many of these mitigating circumstances to melt away. European refineries will need to restock their supplies of crude and there will likely be an increase in demand for refined products like gasoline as summer vacations start. Japan’s demand for oil will also likely increase, and maybe rapidly, as the country begins the process of rebuilding and reconstruction. US refineries will also be ramping up from their maintenance period.
Finally, as the factors that mitigated the rise of prices after the Libyan crisis weaken, speculators will likely see chances for even greater profits. Their movements into the futures and other “paper” markets for crude will likely push the price up even further. And if the revolutions and rebellions move to Algeria or Iran—and especially if they move to Saudi Arabia—then all bets are off: $200-300 per barrel would not be out of range and the world economy would be hammered.
Of course, these expected increases in demand may drive producers to ramp up production, especially in the OPEC countries like Saudi Arabia and the United Arab Emirates that have excess production capacity. But not only is there a question about how quickly they can ramp up production—it’s also unclear whether they will want to. Clearly OPEC does not wish to see the price of oil go up too high for too long. That would cut into demand and spur investments in alternative energy sources, especially for transport, which uses most of the oil in the world. But they also want to have the good times of high oil prices continue as long as possible.
Anyone for investing in electric bikes and cars? This could be the set of shocks that finally sets us on the course of more sustainable transport technologies. However, nothing is certain except that everything is uncertain. That sense of uncertainty will likely push the price of oil even further. Welcome to the future.
Paul Sullivan is a professor of economics at the National Defense University (NDU) and an Adjunct Professor of Security Studies and Science, Technology and International Affairs at Georgetown University.
Follow @tnr on Twitter.