Libya Attack Sends Oil Prices Higher

Jim Brown
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The long awaited no-fly operation is in effect over Libya and crude prices have taken off again on the news. Add in the violence in Yemen, Bahrain and other countries and we should have price support for several weeks ahead.

WTI crude spiked to $103 when it opened on Sunday night after two days of coalition bombing in Libya. Brent crude spiked to $116 and neither is showing any signs of weakening. Yemen president Saleh fired his cabinet and security forces are still taking shots at demonstrators. More than 100 people have been killed in the last week. Electricity was cutoff in the capital for three hours surrounding the funeral procession for the 44 people killed on Friday. People said it was to prevent televised coverage of the procession. In that same confrontation 192 were wounded.

The $93 billion in new stimulus spending by Saudi Arabia's King Abdullah appears to have pacified the masses and there were few instances of spontaneous street protests. All those attempted were immediately broken up by police.

The Libya coverage suggests the coalition has broken the back of Gadhafi's military and rebels are again streaming westward. Egypt is supplying rifles and reportedly there are some components of SAS teams from the UK supplying tactical information to the rebels and target spotting for the coalition.

In one interview with a rebel leader they were estimating two weeks to eliminate Gadhafi without the threat of bombing and artillery strikes.

The risk will be a deadlock somewhere in the middle of the country where Gadhafi controls the western half and the new opposition government the eastern half. Gadhafi has the money to rebuild the oil facilities and he will be in a rush to do so but quite a few of those are in the eastern half of the country. The opposition has no money. This could lead to a protracted shutdown of oil production.

Most oilfield workers have left Libya and they won't be coming back until peaceful conditions return. With the potential for a protracted civil war that may not be any time soon. Even if they come back this summer there is no guarantee they can get the produced oil to market with damage to the storage and distribution facilities.

Gadhafi has also threatened to destroy more facilities to keep the coalition from "stealing" Libya's oil.

Libya's government demanded all oil companies go back to work and all workers return. The Foreign Minister Khaled Kaaim, building on earlier threats, said Libya may adopt preferential policies when reviewing oil contracts with companies and countries. That means companies and countries who honored the sanctions could be cut off from their assets in Libya and from receiving future production. Some are privately fearing their assets will be nationalized should Gadhafi win.

More than 280,000 people have fled Libya according to the United Nations. China evacuated over 36,000 Chinese workers, many of them from the oil fields.

This is a partial list of companies with production in Libya.

The next two weeks will be critical for the future of Libya and for gasoline prices around the world. With Japan ramping up their refineries to 100% capacity and the summer driving season just ahead the price of fuel is going to get expensive.

The average price of gasoline in the U.S. was $3.57 this weekend with Diesel $3.92. The EIA expects gasoline to rise to $3.75 in the summer and $4 in the fall. That would put diesel around $4.50 and a major crimp in economic activity.

The OECD (Organization for Economic Cooperation and Development) said every $10 rise in oil prices from $80 would add 0.2% to the inflation rate in the first year and 0.1% in the second year. Likewise every $10 hike will decrease GDP by 0.2%.

We are already seeing a decline in demand in the USA for gasoline and I fear this will be a problem for the struggling recovery.

Jim Brown

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