- The Washington Times - Monday, February 21, 2011

Oil prices soared and global stocks plunged Monday on signs that Libya, a major exporter, will cut oil production amid spreading violence and unrest.

Libyan leader Moammar Gadhafi’s son, Seif al-Islam, warned that Libya’s oil wealth “will be burned” if the unrest leads to civil war, while an influential Libyan tribal leader offered a counterthreat to cut off oil shipments to the West within 24 hours if the regime’s violence against protesters does not end.

The turmoil in Libya sent the price of premium crude oil in London soaring above $105 a barrel, the highest level in 2½ years, while stocks throughout Europe fell from 1 percent to 2 percent.

Most U.S. markets were closed for the Presidents Day holiday, but the price of U.S. premium crude surged 5 percent to $90.13 in electronic trading on the New York Mercantile Exchange. Officials sought to calm markets by pointing to the world’s strategic reserves of oil.

International Energy Agency official David Fyfe said the prospect of an interruption in oil production in the Middle East is “a real concern” because the region lays claim to 60 percent of the world’s proven oil reserves and 40 percent of global gas resources.

**FILE** Prices for gas are seen Wednesday posted in view of the city skyline in Philadelphia. (Associated Press)
**FILE** Prices for gas are seen Wednesday posted in view of the ... more >

He emphasized that major consuming nations such as the U.S., Japan and Germany have stockpiled 1.6 billion barrels of oil — enough to provide 4 million barrels a day for a year — in preparation for any disruption.

Libya exports about 1 million barrels a day, primarily to European customers. The U.S. strategic reserves have been tapped twice in emergencies — once during the Persian Gulf War in 1991 and again after Hurricane Katrina interrupted U.S. production in the Gulf of Mexico in 2005.

“It’s very much a last resort,” Mr. Fyfe told reporters in London, “but it’s worth pointing out that it exists and has been used before when supplies have been disrupted. It’s a sort of insurance policy for the market.”

The violence in recent days in Libya has prompted BP PLC to suspend operations and evacuate 40 workers and their families. Other oil companies operating in Libya, including Norway’s Statoil and Austria’s OMV, also evacuated workers, though they continued to pump oil where possible.

“Events in the Middle East are of intense concern,” Ian Smale, a BP executive, told an International Petroleum Week conference in London. “With specific regard to Libya, our first concern is our people and the security and integrity of our operations.”

Elsewhere in the Middle East, the Persian Gulf state of Bahrain, a smaller producer, also faces persistent street demonstrations calling for a new government. Saudi Arabia, Bahrain’s neighbor, has offered to provide military support to the tiny island nation’s ruling family if it can’t handle the protests itself.

Saudi Arabia is the largest producer by far in the region, a major supplier to the U.S. and the one with the most spare capacity to ramp up production should supplies become tight. The kingdom has experienced protests, though they have been low-key and small-scale compared with the ones in Tunisia, Egypt and now Libya.

“The market will be most concerned over protests spilling into Saudi Arabia,” said Rebecca Seabury, an energy consultant at the British firm Inenco.

“As Saudi Arabia is the world’s largest oil exporter, if the situation escalates, this could take oil prices higher than the $147 a barrel we saw in 2008,” she said.

Robert B. Zoellick, president of the World Bank, said Group of 20 finance ministers voiced concerns at a meeting in Paris during the weekend that “the geopolitical risks to energy prices could set back the recovery” in the world economy.

Story Continues →