The crisis in Libya is halting production of some of the world’s most coveted oil. The reservoirs beneath its desert landscape yield crudes that are easily refined into diesel and petrol and also low in sulphur, making them cleaner to burn. Opec, of which Libya is a member, has adequate spare supplies to replace the country’s lost production – but the quality is mostly inferior. “Libya is a producer of light, sweet crude,” says Andy Lipow, president of Lipow Oil Associates, a Houston consultant. “The spare capacity among Opec members is heavy, high-sulphur crude.” This means sustained, widespread stoppages of Libyan production could require oil companies to do more than just replace lost barrels.
They would need to find barrels of equivalent quality from Algeria, Nigeria, the Caspian region or the North Sea. The bidding could further raise prices for the kinds of high-quality crudes that underpin benchmark oil futures contracts and reduce fuel output from refineries unable to afford them.
Crimping Libya’s crude flow comes at an inconvenient time. The world’s thirst for oil is especially strong in diesel and other distillates, which JPMorgan estimates will account for more than half the world’s demand growth this year. Light crudes yield more diesel per barrel than heavier crudes.
Environmental regulators are also clamping down on sulphurous fuels to combat air pollution, boosting demand for low-sulphur , or “sweet”, crudes. Europe this year limited sulphur content in fuels for some machinery and on inland waterways, and in 2012 will expand the restrictions to trains, according to the International Energy Agency.
Similar trends are taking place in the US. The US Department of Energy just sold 2m barrels of high-sulphur heating oil from a strategic reserve and will soon be bidding for the same amount of low-sulphur oil this summer, further stoking demand.
Before the crisis Libya produced about 1.6m barrels of oil a day, or 1.4 per cent of global oil output. At least half its production was halted as of Wednesday.
Libya’s crude stream includes Es Sider, whose light density and low sulphur content of 0.44 per cent makes it an alternative to light, sweet global benchmarks such as the UK’s Brent blend or West Texas Intermediate in the US. Repsol YPF, the Spanish oil producer, has shut down the huge El Sharara oilfield 800km south of Tripoli, whose crude is a mere 0.07 per cent sulphur.
“This definitely will have an impact. Those are high-quality barrels that you will potentially lose,” says David Kirsch, market analyst with PFC Energy, a Washington-based consultant.
Saudi Arabia, the de facto custodian of Opec’s 4.7m b/d of effective spare capacity, will “meet any shortage,” oil minister Ali Naimi said this week. But its oil is a poor substitute for Libya’s. Arab Light, the leading Saudi oil by volume, is a relatively high 1.8 per cent sulphur and heavier, so more difficult to refine into light products such as diesel.
Some analysts are already drawing comparisons to 2008, when a shortage of light crudes well-suited for diesel helped send Brent and WTI above $145 a barrel. Brent reached $111 on Wednesday, a two-and-a-half-year high.
“Growth in global diesel demand combined with tightening environmental regulations will put increased pressure on demand and prices for light sweet crudes,” energy economist Philip Verleger says. “This could be 2008 all over again.”
Analysts caution that the situation is in many ways different from 2008. Refiners have since invested hugely in turning heavy barrels into light products. Global refinery distillation capacity is also up 3.3m b/d since 2008 to 92.5m b/d, says Toril Bosoni, IEA refining analyst.
Commercial oil stocks in western countries, while declining rapidly in the fourth quarter, in December still topped levels of December 2007, the IEA reported. In the US, the 727m-barrel strategic crude reserve contains 293m barrels that are low in sulphur. The IEA suggested that Opec would act first to fill any shortfall from Libya.
But fearful times spur companies to add to stocks as a precaution. Lawrence Eagles, JPMorgan head of oil research, says: “This kind of uncertainty raises demand for inventories.”