Libya Crisis Sends Oil Prices Surging

By Pierre-François Besson

Oil prices have soared to the highest level in more than two years as Libyan leader Moammar Gaddafi clings to power despite massive dissent in the oil-rich country.

Gilles Carbonnier, professor at the Geneva-based Graduate Institute, tells swissinfo.ch that Libya’s oil production remains crucial for the industrialised world even if the Organisation of Petrol Exporting Countries (Opec) is increasing its output.

Transport links with Libyan ports were interrupted on Tuesday as a result of the unrest, according to the London-based maritime transport authorities. The price of crude oil surged while stocks in Asia and Europe plummeted.

Carbonnier is the director of the Graduate Institute’s International Development Policy Series publication and an expert in resource management.

swissinfo.ch: Libya is the first oil exporting country in North Africa to be hit by political upheaval. What is the impact?

Gilles Carbonnier: It triggered a price hike because the traders expect difficulties for oil supplies. At the same time they expect prices to climb even higher.

But we will have to wait and see how the political situation develops to know whether it is more than a temporary increase.

There is good reason for the nervous reaction on the trading floor. The petroleum market is driven by high demand and production runs at full throttle. The markets react swiftly if an important producer such as Libya interrupts production.

No other country can step in from one day to the next to compensate for Libya’s supplies.

It shows that countries like Switzerland which depend on the import of oil, urgently need to make sure they buy their supplies from different sources and increase their efforts to boost the production of renewable energy.

swissinfo.ch: Assuming the unrest spreads further in the region, what will be the critical point for the oil and gas market?

G.C.: When Libya stops oil production altogether. Importing countries have a minimum stock to be able to straddle a temporary production breakdown. The situation will become serious if the crisis begins to affect oil production in neighbouring Algeria.

The worst case scenario is if Saudi Arabia, the world leader in oil production, were to be drawn into the wave of political unrest. This could make the oil crisis of the 1970s look like minor events.

swissinfo.ch: To what extent does Gaddafi’s fate affect the supplies of oil to other countries?

G.C.: The oil is in Libya, regardless of whether Gaddafi’s regime is still in place or not, and any government after him will be interested in selling oil which is an important source of income for the Libyan state.

What could be much more dangerous for the markets is an unstable and violent transition period, between the end of the autocratic regime and the establishment of democracy, with insecurity in Tripoli and in [oil] producing regions, and with foreign experts leaving and difficulties arising in maintaining the production system.

swissinfo.ch: The possible end of the Gaddafi regime might raise the question whether the Libyan oil industry should be privatised or be state run. Which is the better solution?

G.C.: It is ultimately a political question. In practice most oil producing countries set up a public state-run company that cooperates with the big companies in the west and increasingly in China and Malaysia, which contribute their technological know-how.

swissinfo.ch: How democratic can a country be with an economy driven by oil production?

G.C.: There is this term ‘the curse of oil wealth’. Very often oil producing countries are run by authoritarian regimes. They stay in power because it is based on the distribution of wealth to the most important groups in a society.

In such countries the state does not levy taxes on the working population. It is a system based essentially on oil revenue. As a result the state is not accountable to its citizens, like in democracies, but only to a foreign company which is paying for the oil.

A more democratic system, I’m convinced, would boost economic development in medium and long term.

Pressure groups from other sectors could begin to lobby for their own interest in agriculture or the service industry. This in turn could help create a more varied economic and political structure.

Take the example of Norway. It started producing oil on big scale in the 1970s and this in turn triggered a major public debate, as part of the democratic system, on the use of its oil.

What happened was that Norway decided to spend the income on economic development in other sectors and set up a fund for future generations for an era once oil reserves have been exploited.

(Adapted from French by Urs Geiser)