Worldwide Loss Of Oil Supply Heightens Syria Attack Risk
Libya’s oil output has crashed to a near standstill over the past year as warlords and strikes paralyse the country, tightening the screws on global crude supply as the crisis in Syria comes to a head.
“We are currently witnessing the collapse of state in Libya, and the country is getting closer to local wars for oil revenues,” said the Swiss-based group Petromatrix.
The country’s oil ministry said production has slumped to an average of 300,000 barrels per day (b/d) in August, down by more than four-fifths from its peak after the overthrow of the Gaddafi regime two years ago.
“Militia groups are behaving like terrorists, using control over oil as political leverage to extract concessions,” said Dr Elizabeth Stephens, head of political risk at insurers Jardine Lloyd Thompson. Port closures and strikes have compounded the damage but the deeper story is the disintegration of political authority.
Libya is the most extreme example of political mayhem around the world disrupting output and causing a chronic shortfall in oil supply. Production has slumped in Iraq, Nigeria, Iran, Yemen and Syria itself, each for different reasons.
This has cut daily global supply by 1.1m over the past year to 92m, explaining why Brent crude prices have remained stubbornly high despite the slump in Europe and China’s slowdown. To compound the problem, Libya’s oil is some of the highest quality produced in the Middle East and the kind preferred by European refiners. Jitters over Syria have already pushed Brent to $115, near levels that typically erode confidence and inflict serious economic damage.
Bank of America says the “global shortfall” in oil has reached 4m b/d and leaves the world extremely vulnerable to a supply crunch if any missile strike in Syria goes wrong.
The bank said the most likely outcome would be a “short-lived spike” to between $120 and $130 provided the Nato operation is limited to a few days. The bank said a “protracted Vietnam-style boots-on-the-ground proxy war” could lead to a $50 jump, pushing Brent crude to $160.
The warning follows a disturbing report by Societe Generale’s Michael Wittner, a former oil analyst for the US Central Intelligence Agency and an expert on geo-strategic issues.
Mr Wittner predicted a rise in oil prices to $150 if the missile strikes lead a regional spillover, citing retaliatory attacks by Iran on Iraqi oil supply lines as the chief risk. Conflict between Iraqi Sunnis and Shiites has returned to levels last seen in 2008.
“Our big worry is Iraq,” he said. The country’s northern pipeline from Kirkuk to Turkey has been attacked repeatedly over the past three months, cutting exports by 40pc. Mr Wittner said the danger is that the attacks will move south to the Basrah port complex that supplies 2m b/d, this time orchestrated by Iranian proxies.
“Iraq is close to civil war,” said Jardine’s Dr Stephens. “Pipelines keep being blown up by al-Qaeda and Sunni militants – it is never quite clear – and this is a huge impediment. On top of this there is still no hydrocarbon law and no legal framework for contracts because they can’t agree on how to carve up the pie.”
Iraq’s output has slipped to 2.9m b/d from 3.2m in April, far short of expected levels.
A report by the International Energy Agency said last year that Iraq’s output would reach 6m b/d by the end of the decade, and 8.3m by 2035, adding almost half of all extra global oil supply. That now looks like a distant dream.
Dr Stephens said an attack on Syria could fly out of control in all kinds of unpredictable ways. “Syria is pivotal to the whole region. Even if the Assad regime is ultimately toppled, it will not solve anything. It will more likely drag in every surrounding state and external powers.”
The US has 710m barrels of oil in its strategic reserves and other OECD states have stocks that could be released to offset any price shock, as occurred during the Western assault on Libya. However, shortfalls in so many countries at once have greatly increased the risk of a supply squeeze.
Nigeria’s output has slumped to 1.9m from 2.5m over the past year as bandits prey on supplies in the Delta region, while scheduled rig maintenance will shave a further 500,000 b/d off output in the North Sea and Canada. United Nations sanctions against Iran over its nuclear enrichment programme have drastically reduced Iranian oil exports by 1.2m b/d.
The slip in supply has come just as China starts to rebound, with imports of crude jumping 20pc in July to an all-time high. The eurozone is also coming back to life, led by a resurgent Germany.
Citigroup said it is far from clear whether Saudi Arabia has the spare capacity to crank up production by up 2m b/d to cushion any shock if necessary, as widely assumed, to help cap any rise in oil prices. “There is no tangible evidence of this,” it said.
There are still pockets of rising oil output, notably in the US where shale oil is rapidly reducing US dependence on energy imports. The geo-strategic effect of shale is double-edged for the US: it lowers the incentive for Washington to commit forces to the Middle East, but it also means the US is better able to handle the consequences of any oil spike.