Wednesday, February 23, 2011

Libyan unrest drives up oil price

As unrest and anti-government protests spread across the Middle East there is growing concern that the instability may affect the world's oil supply and slow economic recovery.

Of particular concern are reports that Libyan exports are being interrupted by disorder at the terminals and that major companies including Royal Dutch Shell, ENI of Italy and Repsol of Spain have been cutting output and evacuating staff.

Blocking exports

On Tuesday Libya began blocking exports though it was not immediately clear if this would affect oil exports. However more than 8% of Libya's 1.6 million barrel daily production has been shut down by the violence. This has been due to the fact that much of the unrest has been concentrated in the eastern province of Cyrenaica, home to the bulk of Libya's oil reserves.

Libya provides 2% of the world's oil supplies and although Opec powers such as Saudi Arabia and Iran may well be able to make up a shortfall, there are fears amongst traders that any spread of the growing unrest may push the price of crude through the roof.

"The world could deal with the loss of Libyan barrels, but the worry is that it won't stop at Libya," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis. "We don't know where this is going to end."

Crude rises

Oil rose for a fifth day in New York as violence intensified in Libya. On Tuesday Futures in New York surged 6.4% from the February 18th settlement, while London-traded Brent rose to $108 a barrel, the highest since September 2008. This year alone crude has risen sharply from $85 a barrel and some say "the sky's the limit" for oil prices and that $150 a barrel could be reached "without breaking a sweat". This would have severe implications for economic recovery, inflation and living standards worldwide.

The world economy can withstand the surge in oil prices for a short time, John Lipsky, the number 2 official at the International Monetary Fund, said on Bloomberg Television's "Inside Track" yesterday [Bloomberg]. 

Stocks fall

But it is the long-term uncertainty that is sending oil prices up and sending stock markets around the world tumbling. On Tuesday the FTSE-100 index slipped by around 1.5%, before recovering to close the day down just 0.3%. There were similar losses on the American, German and French exchanges. Markets in China and Japan also saw falls, with the earthquake in New Zealand adding to the tension.

Badly hit were the stocks of heavy users of fuel and and companies vulnerable to further cutbacks in consumer spending. Airlines in particular saw their share prices fall dramatically and oil majors also experienced a sharp drop in the value of their stocks.

"The market is very nervous over news of violence in Libya and that's driving [crude] prices. It looks like the uncertainty in the region is not going to be resolved soon," Yinxi Yu of Barclays Capital said [Independent].

Libya's oil wealth

Libyan leader Muammar Qaddafi has vowed to fight the growing rebellion until his "last drop of blood" and urged his supporters to take to the streets and dispel what he called the "cockroaches" who were challenging his leadership [BBC].

Just as world markets are concerned at the flow of oil from the region, Gaddafi will also be worried about his accumulated wealth. Little is known about the Gaddafi family's personal wealth but as a country Libya earns around $30 billion in oil revenue per year. The population as a whole does not benefit however. More than 2 million people live in poverty, something that is fueling the protests especially in the oil rich regions where local people see few benefits from Libya's oil industry.

Libya invests some of its earnings into overseas concerns. It has holdings in the publisher Pearson which is tied to the Financial Times, and it has also invested heavily in Italian companies including banks and has a 7.5% stake in the Juventas football team [Bloomberg]. Much of the country's wealth is believed to be held in cash.

Future uncertain

The unrest that is sweeping across the Middle East has yet to manifest itself in Saudi Arabia or Iran, but following the regime change in Tunisia and Egypt and the tide of unrest in Yemen, Morocco and Libya, there is uncertainty as to where the revolutionary wave will end.

Stocks and oil prices are not the only victims of the pro-democracy movement seen in the last two months. Dozens died in Tunisia, Egypt and Egypt and there are reports that more than 300 have been killed in Libya thus far.

The unrest is also increasing diplomatic tensions. Libya's tradition of Cuba and Venezuala have called on what it calls imperialist interference to stop. On Tuesday China expressed concern about unrest in Libya but held back from joining other nations in condemning Libyan leader Muammar Gaddafi. The United Nations, United States and the European Union, as well as many other countries, have all criticized the crackdown.

China's concern

China has strong business ties with Libya and trade between the two countries grew to $6.6 billion in 2010, a rise of 27% compared with 2009. China's exports to Libya grew by 3%, while its imports from Libya grew by 42%, reflecting oil purchases. Chinese interests have been attacked by gun-wielding looters and 1,000 Chinese workers were forced to flee a construction site though Chinese Foreign Ministry spokesman Ma Zhaoxu would only say it hoped order would soon be restored. "China is extremely concerned about the developments in Libya and hopes Libya will quickly restore social stability and normality," Ma said [Global Security].

China's Communist Party government is wary of any foreign upheavals that could reflect badly on its own authoritarian controls. It has long been suspicious of what it sees as Western-led efforts to topple governments in other countries. In the wake of the recent turmoil in Arab countries it has also heavily censored the news and any online discussion. An effort to organise a so-called Jasmine Revolution in China was predictably and quickly quashed [FT].

While perhaps concerned for any threat to its own power base, China will be more concerned at its strong business ties with countries that are becoming unstable. The volume of trade between China and Tunisia in 2001 was US$109 million and has grown significantly over the last decade []. The trade volume between China and Egypt was $6 billion in late 2009 and was expected to grow to $10 billion by 2012 [Reuters].

Yuan falls

China's yuan has also fallen victim as political instability in the Middle East drove oil prices higher. Not only will oil price hikes affect import costs it will potentially slow China's development. The country relies heavily on oil imports, around 54% of the crude oil it used in 2010, according to the China Petroleum and Chemical Industry Association. Though much of its oil comes from Angola and Iran it obtains a significant amount from Libya.

The rise in crude has had a direct effect on the yuan which slid 0.21% to 6.5803 per dollar as of 16:32 in Shanghai on Friday, according to the China Foreign Exchange Trade System. It touched 6.5654 on Monday, the strongest level since China unified official and market exchange rates at the end of 1993. The central bank set the reference rate at 6.5772, 0.1% weaker than Monday.

For China's economy, events in the Middle East are a particular concern. "Events in the Middle East may weigh on the global economy," said Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong. "Investors are more risk averse. It's not a surprise that the People's Bank of China will be more cautious on the yuan." [Bloomberg]

tvnewswatch, Beijing, China

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