Right before the Libyan war started, Libya was accounting for about 2% of the world’s daily oil demand with production hovering around 1.6 million barrels of oil per day in February. Not only does Libya hold the largest oil reserves in Africa (17th in the world) its light grade high quality oil is preferred by western European refineries for its ease of processing.
Does that mean oil prices won’t be dropping lower? Of course not, given the current pessimism with the global economy, double dipping will pull down oil prices easily but only on a temporary basis. You need to keep in mind that many OPEC countries have break even prices at $90 oil or higher, so even if Libyan oil is restored at 100% in a few months or if economic jitters pull oil prices lower it will only be short lived. Saudi Arabia, the largest oil producer in the world needs $90 oil or more for budgeting purposes. They have to buy peace in the kingdom in light of all the unrest surrounding them now. Any dramatic drop in oil prices will swiftly be countered by a cut in production which will set a solid floor under the price. This means bringing Libya’s oil back online might not have the hoped for effect on prices to the extent you might have imagined or hoped for.
Libya is in Europe’s backyard and historically it’s been a playground for Italian colonialism. With the breakout of the rebellion, European countries were first to recognize the national transitional council (the Rebels) as Qaddafi favored Russia, China and India for oil contracts because they opposed tough sanctions on Gaddafi. You see, we in the west recognize quite well what suits our business best. Someone’s rebels are our freedom fighters or vice versa. NATO’s military intervention for the sake of protecting civilians (great PR stunt in my opinion) was the perfect Trojan horse as the outcome brings Libya back under the European sphere of influence securing precious oil resources. With the end of Qaddafi’s regime comes the time to reap the rewards of supporting the rebellion while China and Russia stand to lose out big time.
Libya’s oil will come to the rescue alright, in multiple ways as it will constitute a small QE package for Europe amounting to billions of dollars in oil exploration & development and large infrastructure reconstruction contracts. After all, NATO did a good job with its warplanes and collateral damage is not so bad since petrodollars will pay for its reconstruction. At least in this case, the broken window fallacy does not apply since oil money was going to Qaddafi’s family prior to that. Furthermore, a growing Libyan oil production will contribute to world price stability as increasing supply meets a growing world demand.
Did you ever wonder why the Arab awakening was crushed in Bahrain and is going nowhere in Yemen? It’s because these 2 countries are Saudi Arabia’s neighbors and under its sphere of influence. It is in the interest of the West to shield Saudi Arabia from unrest, who cares if it’s a kingdom where women don’t have the right to drive. Who cares if there’s a crushed majority in Bahrain or if Yemen’s dictatorship is 40 years old. Oil, the fuel of global economic growth, trumps them all.