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What Libyan Unrest Means for Oil Prices

Oil prices hit a two and a half-year high on Tuesday as turmoil mounted in Libya

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As widespread, bloody revolt and army defections threaten Muammar Qaddafi's four-decade grip on power, global stock markets are reeling and the price of oil is soaring, hitting a two and a half-year high on Tuesday. Why has the uprising in Libya affected oil the way it has, and how worried should we be? Here's a quick FAQ to shed light on the situation:

Other Arab countries are experiencing uprisings--why are financial markets focusing on Libya?

Libya is the first member of the powerful Organization of the Petroleum Exporting Countries (OPEC) to experience significant protests. The country pumps 1.6 million barrels of oil a day, or about two percent of the world's supply, and exports 1.1 million barrels, making it the world's 17th-largest oil producer. Libya is the third-biggest oil producer in Africa and has the largest proven oil reserves on the continent.

Is Libya more important for oil than Egypt?

Yes. Just under three percent of the oil the world produces pass through Egypt's Suez Canal and Sumed pipeline, but Egypt is not an oil exporter like Libya.

Is Libya's oil production really in danger?

Foreign Policy's Steve LeVine notes that Qaddafi has lost control of the eastern part of his country, where half of the oil industry is based. But he adds that Libya's oil installations are located far from population centers, and the oil sector may be able to run "autonomously from any trouble, continued instability and chaos in the cities."

Joshua Schneyer at Reuters, however, disagrees. He asserts that the revolt in Libya will likely damage the country's oil sector. "The scenarios run the gamut from all-out civil war and attacks on energy infrastructure to low-level neglect and reservoir damage, as foreign expertise flees the country," he says. Reuters estimates that 300,000 to 400,000 barrels per day of Libya's oil production have already been halted, as foreign companies evacuate staff and suspend operations.

But is Libya really what's spooking markets?

Not exactly. True, Europe and especially Italy rely heavily on Libyan oil, and U.S. consumers will confront higher gasoline prices stemming from the turmoil in Libya during a period of fragile economic recovery. But the real concern is that the protests spread to other OPEC countries like Kuwait or Saudi Arabia, the world's largest oil exporter.

Could Saudi Arabia be next?

Responding to protests in neighboring Bahrain, Saudi Arabia's King Abdullah announced on Tuesday that the country will increase spending on social security and housing by $11 billion or more. Reuters, meanwhile, is reporting that hundreds of people have joined a Facebook campaign calling for a "day of rage" in Saudi Arabia next month to demand an elected ruler and legislature, an independent judiciary, more freedom for women, and the release of political prisoners, but the report adds that it's unclear how many of the group's members are in Saudi Arabia or whether the protest will actually amount to anything.

Michael Levi at the Financial Times says that while the chances of unrest spreading to Saudi Arabia are small, the world must prepare for the scenario and think about how it would leverage strategic petroleum reserves in such a situation because uprisings in Saudi Arabia would be a "huge shock to the markets."

This article is from the archive of our partner The Wire.