Analysts+say+Libya+crisis+can+push+oil+prices+past+US200

Analysts say Libya crisis can push oil prices past US$200 Source: http://www.channelnewsasia.com/stories/afp_asiapacific_business/view/1115254/1/.html Date of article: 03/09/11 Date of extract: 04/04/11

Shortage: Occurs when quantity demanded is greater than quantity supplied Substitute: A good that can be easily replaced by another.

Africa, being the main exporter of crude, accounts for the oil that is being used in our everyday lives. However, the recent social unrest among countries in Africa has caused a worldwide increased in oil prices. A supply and demand market is used to demonstrate the factors affecting the oil prices and the expected outcome of it.

As mentioned in the article, Libya is the fourth biggest oil exporter in Africa, and the political unrest in Libya has resulted in a decline of oil production as seen in the diagram below. Initially, Libya produces 1.6 mpd of crude for P0 at equilibrium point E0. As the political unrest and poor security environment in Libya continues, foreign companies seek to evacuate their employees, halting operations and the production of oil. The supply curve hence, shifts to the left from S0 to S1. This drives the price up from P0 to P1, resulting in a new equilibrium point E1. The movement of the supply curve from S0 to S1 indicates that this increase in price of crude is caused by a non-price factor of supply that has changed.

The impact of oil shortage is felt worldwide and concerns of the International Energy Agency (IEA), which represents the interests of industrialized oil-consuming nations like the United States and United Kingdom, are growing. Diagram 2 shows how the increasing demands along with the supply disruptions of oil result in a soar of oil prices. Not only are the IEA member countries facing oil shortages, many countries, particularly developing Asian countries are facing oil shortages as well. Initially, quantity demanded is at Q0, equilibrium point E0. The decrease in supply of oil from S0 to S1 outweighs the increasing demand for oil from D0 to D1, and this leads to a shortage, shown by the gap between Qs and Qd, and the soar of oil prices from P0 to P1.

In an attempt to buffer the soaring oil prices, and to relieve the shortages nations are experiencing, the Organization of the Petroleum Exporting Countries ( OPEC) developed a substituteii for Libya’s crude. This is shown in Diagram 3 below. The aim of the substitution would be to decrease demand for light sweet crude from D0 to D1, and hopefully, to use the substitute to replace the supply of oil loss from S0 to S1. The outcome would be a fall in oil prices from P0 to P1. However, in reality, OPEC might not be able to achieve such optimistic outcome, as the substitute might not be suitable or satisfy certain consumers.

Theoretically, the theory of the supply and demand assumes several physical factors that could affect the prices of oil, while all things remain constant (ceteris paribus). Hence, the reduction of crude supplies should seem to be the cause of rising oil prices. However, in reality, the theory might not hold true, as the recent crude prices are mainly as a result of financial speculation. Looking at the global view of the market for crude, the shortage of crude might not be as bad as it may seem as Saudi Oil Minister Ali Naimi claims that his kingdom could produce an extra output of 3.5 mpd to replace Libya’s shortage. However, uncertainty and market fears prevail over claims, and thus, the prices of crude would continue fluctuation according to political situation in the Middle East and Africa. In conclusion, this article clearly portrays the volatility and vulnerability of oil prices, and how politcs and speculation play an important role in affecting it.