Brent Crude oil prices rose last week to nearly $117 per barrel, which represented an increase of approximately $6 within one week. This increase was justified by the seriousness of the security situation in the Middle East, particularly the possibility of a war on Syria. It is well known that Syria is not one of the major exporting countries, however there are major concerns regarding the implications of a possible war on the situation in the region in general and the possibility of explosions and unrest in neighboring countries.
The truth is that the Middle East oil industries are witnessing several problems, some of which are caused by the absence of strong state institutions or the lack of political consensus among the ruling classes. This is the case in Iraq, which is facing great difficulties in increasing its oil production capacity to expected levels, thus generating a large deficit in the current year’s budget. In Libya, armed militias halted production in oil fields and exportation from ports. Some of them even contacted international oil companies, offering to sell them oil on the black market. In this context, the sharp fall in Libyan oil supplies led to a significant increase in prices.
This rise in crude oil prices may be attributed to three factors. The first is the high probability of an attack on Syria. The second is the drop of Libyan production by about one million barrels per day below the country’s production capacity; this factor had the most important short-term effect on the global price increase. The third is the expansion of turmoil and terrorism in the Middle East as a result of the Syrian war, which affects the flow of crude oil supplies.
On a different note, several political groups of different backgrounds and political identities participated in the Libyan revolution against the regime of former President Moammar Gadhafi. These included reform parties, Islamist militias and the Muslim Brotherhood, in addition to regional and tribal forces. Moreover, since the start of the uprising, there were open and clear conflicts between the various tribes. Following the deposition of Gadhafi in Oct. 2011, a tense political environment prevailed over the country. The situation was characterized by violence as well as continuing attempts at exclusion among the rebels in order to exercise power. As expected, this turbulent political situation affected the oil industry and the rest of the country’s economic sectors.
Interruptions in Libyan supplies have been ongoing since December 2012. Production was interrupted at the al-Sharara field (about 340,000 barrels per day), and the Zoatana and Ras Lanuf ports faced obstacles leading at first to a limited shortage in production.
It is worth mentioning that top level officials from the National Oil Corporation (NOC) — including engineers and workers — were able, immediately following the success of the revolution, to restore production capacity to a pre-crisis level of about 1.6 million barrels per day. This is despite the fact that during the revolution all foreign oil companies withdrew from Libya — fearing for the safety of their employees — only to return later after the success of the revolution and the stability of the security situation.
However, the sit-ins and occupations of oil fields and export ports have recently increased, which negatively affected petroleum operations. Production shrunk to 1.37 million barrels per day during the first quarter of the year. In light of the militias’ control in recent months, production plummeted to 1.2 million barrels per day. The situation was deteriorating gradually. The sit-ins at the Ras Lanuf Port and its refinery blocked production and export operations in this vital industrial zone. The protests and occupation are due to the lack of security in the country and to the profound differences among the ruling classes. This paved the way for chaos and exploitation of the situation in favor of this or that party, especially if a given party was armed or supported by influential political parties in the ruling regime. This chaos is not confined to Libya, but also has plagued Iraq. The most frightening thing about this is that it started to spread in the region concurrently with the expansion of regional political unrest.
For instance, last week militias in Libya closed the oil pipelines from the al-Sharara and al-Fil oil fields in the south of the country, which have a production capacity of about 500,000 barrels per day, i.e. about one-third of the country's production capacity. They also prevented the delivery of crude oil to the ports. Moreover, these sit-ins backed by militias prevented oil workers from exporting oil from Marsa al-Brega port for nearly a month (from the end of July to late Aug.). Recently, the country’s oil production capacity was cut in half.
Labor unrest in Libya reflected widespread concerns that the ruling regime has not able been to address since the overthrow of the Gadhafi regime. Furthermore, labor movements on the one hand, and action taken by militias on the other, are blatant examples of the government's inability to control security. The latest information refers to the decline in Libya's crude oil production to about 650,000 barrels per day, compared to about 1.4 million barrels per day in July. Market concerns are concentrated on the continued production decline. Conflict with the militias pushed the government to threaten to bomb ships loading black market oil.
The biggest source of concern is that this oil conflict between the government and the militias will turn into an open and continuous conflict adversely affecting the country’s economy, if the militias manage to get their hands on this huge financial resource and deprive the State Treasury of it. Yet how will the militias use these millions of dollars? Of course, armed groups will need agents experienced in the oil market in order to sell oil to international companies. In this case, these [agents] will receive significant shares. The militias are working with large armed groups both inside and outside Libya. If [the militias] were to gain control, terrorist militias would have increased access to the market’s financial resources, which would help them export their bloody actions to several countries. Interruption or shortage of production deprives the Libyan treasury of hundreds of millions of dollars, in light of citizens’ increased aspirations for further support of their needs.
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