A decline in oil production in Libya as a result of the escalating violence has caused oil prices to reach their highest level since 2008 and experts say national and global economic recoveries could be in jeopardy if protests spread through the region.
The price of brent crude on Monday hit a 2-1/2 year high of $108.70 a barrel, and early reports on Tuesday show it trading at $106.50 a barrel. As protests in the Middle East continue to escalate and spread throughout the region, oil production has been impacted.
Reuters reported on Tuesday that Libya’s 1.6 million barrels per day (bpd) in oil production has dropped by more that 8 percent as a result of the country’s escalating violence.
The country’s marine oil terminals have been disrupted due to communication breakdowns. Rebel soldiers say the eastern part of the country has broken free of Muammar Gaddafi’s rule, according to Reuters. Traders say Libya has declared force majeure on all oil export products.
Chris Jarvis, president of Caprock Risk Management in Hampton Falls, New Hampshire, said: “Geopolitical events have sparked a move higher as oil prices have rocketed on the headlines of of Libya,” according to Reuters.
Italy could be heavily impacted by the declined production currently seen in Libya. Eni SpA, the Italian oil producer, could be at risk as it derives about 14 percent, or 250,000 bpd, of its total production from Libya, Bloomberg reports.
“Italy and particularly Eni are heavily exposed in Libya and stand to lose a great deal if things fall apart,” said Nicolo Sartori, energy and security researcher at Rome’s Institute for International Affairs, according to Bloomberg. “Eni’s production and exploration interests in the area are considerable,” he added.
Eni has been drilling for oil in Libya during all of Gaddafi’s 41-year rule of the North African country and is Libya’s biggest investor. It saw its shares on Monday drop the most in the last 19 months.
Eni announced on Tuesday that its gas supplies to Italy and Europe have been suspended. In a statement, the company said some oil production has been stopped, although there are no reported damages to the production facilities. Eni says it will be able to compensate the loss in production with supplies from other sources, Bloomberg reported.
Experts are busy urging calm as they keep a close eye on events in Libya. Under a nightmare scenario, oil could quickly match its 2008 high of $150 per barrel, greatly impacting any economic recovery on the horizon.
“From an objective standpoint, there is no reason to panic right now,” said Jeffrey Garten, professor of international trade and finance at Yale University, Huffington Post reports. Escalation in the Middle East could change that mindset.
“The real nightmare scenario would be if the rebellion spread to Saudi Arabia,” Garten added. “Anyone who says it couldn't happen and it couldn't happen in a short period of time is just [guilty of] wishful thinking.”
The German oil producer Wintershall AG has already begun flying its workers out of Libya, HuffPo reports. That has forced its 100,000 bpd production to drop, as well.