How high will oil prices go?

By Greg Priddy

There are several political factors adding upward pressure on oil prices at the moment. Libya, Africa’s third largest producer, has descended into civil war. Saudi assurances of increased supply haven’t been as specific as some would like. Most importantly, there is worry that spare capacity could be essentially tapped out if we see a second big disruption in the Middle East or North Africa.

For the moment, the worries are exaggerated. Market fears are not easily quelled, and the risk premium in prices will be with us awhile longer. But if Libya’s troubles continue for several more weeks, the Saudis have very good reasons to eventually make up the full volume, and the risk is small that any of the region’s other major oil producers will face the turmoil we see in Libya.

The majority of Libyan crude oil export volumes will probably be offline for months, not weeks. Saudi and other Gulf Cooperation Council members can cover Libyan volumes, but the risk that a second substantial disruption elsewhere in the region would reduce spare capacity to dangerously low levels would provide genuine cause for alarm.

Market anxiety focuses on countries with large volumes potentially at risk. Algeria, Iran, and Oman have faced protests in recent days, and loud demonstrations in Bahrain and Tuesday’s arrest of a prominent Shiite cleric in Saudi Arabia’s Eastern Province have stoked fear for the stability of Saudi Arabia itself.

Demonstrations in all these countries will continue, but none of them are likely to face the risk of military fragmentation we’ve seen in Libya. Clearly, there are risks of further output disruptions across the region, particularly in Yemen, a smaller producer. But none of these countries faces the kind of unrest that would shut in enough oil to deplete Saudi spare capacity.  

And the Saudis have good reason to keep oil prices in check. Moderate prices will bolster economic vitality among the Saudis’ best customers in America, Europe, and Asia. They will help prevent regional rival Iran from filling its coffers with extra revenue at a moment of Sunni anxiety about Shiite power in the region. They will also ease pressure for development elsewhere in the world of hydrocarbon alternatives.

Greg Priddy is a Global Energy & Natural Resources analyst at Eurasia Group.