Arab unrest will be a test for OPEC
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Una Galani and Fiona Maharg Bravo
Arab unrest will test the limits of the Organization of the Petroleum Exporting Countries. The oil cartel has enough spare capacity to cope with disruptions from Libya and elsewhere. However, the quality of crude differs, and supply could be squeezed if other member countries were to come under threat.
OPEC has around 5 million barrels per day of spare capacity, mostly in Saudi Arabia. That’s twice the amount it had during the last oil price spike in 2008. In addition, members of the International Energy Agency have sufficient stockpiles to pump an extra 2 million barrels a day for two years if necessary.
These reserves are more than sufficient to cover a total shutdown in Libya, which produces around 1.6 million barrels per day, equivalent to 2 percent of global output. Even if Egypt, Tunisia and Yemen also stopped production at the same time, the total loss to world oil output would only add up to 2.7 million barrels per day.
Revolutions and riots in these countries have so far led to manageable disruption. Nevertheless, oil above $110 per barrel suggests markets are pricing in further upheaval. Turmoil in Algeria, with 1.8 million barrels per day, would really spook the market. And if unrest spread to Saudi Arabia, which accounts for about 12 percent of global oil production, a big shock would be on the cards.
What’s more, not all oil is the same. Libya’s high quality crude can’t easily be replaced with supplies from other OPEC members. The increase in worldwide refining capacity in recent years may ease this problem. Italy, which imports about 22 percent of its oil from Libya, has enough extra capacity to process heavier oils, according to STRATFOR, a global intelligence consultancy. But the difference in quality complicates the picture. So does timing; prices react immediately, but it would take Saudi up to one month to bring
extra barrels to market.
Damage to infrastructure from the current tumult could also lead to a lasting squeeze. Countries in Asia with small stockpiles may also feel more pinched. In the long run, oil-dependent countries cannot afford to turn off the taps for long. Even so, the next few months are bound to be bumpy.