By Shawkat Hammoudeh

Dr Hammoudeh is Professor of Economics and International Business at Drexel University. He can be reached at hammousm@drexel.edu.

Libya, which is located in North Africa and next door to revolutionary Tunisia, produces 1.6mn b/d of oil. Libya’s oil production is about 2% of global oil production. Algeria, which is also located in North Africa and geographically very close to Libya, produces 1.9mn b/d. Both countries produce high quality oil (ie light and sweet), which produces a relatively high proportion of gasoline. Saudi Arabia produces 10% of global oil production, possesses 4mn b/d spare capacity and has the highest oil reserves in the world. Almost all Saudi Arabia is medium light and heavy and is not a perfect substitute for Libyan oil. It needs refineries with certain specifications to refine its oil.

Libya is being swept by a revolution that came from Tunisia in the west and Egypt in the east. The Libyan revolution has sent the American WTI crude to more than $100/B and the North Sea Brent to more than $115/B in just a few days. Brent is the benchmark for oil in Europe, Middle East, non-Middle East Asia and Africa. Brent has felt the Arab revolutions more considerably than WTI through the fear or risk premium, which is one of the four major components of the oil price.

Having said all the above, no-one knows for sure how high the oil price will reach before enough is enough. No-one has one number or one sentence that can accurately pinpoint the level the oil price will reach before it turns down in the other direction. But I can envision three scenarios and one of them is likely to happen.

Scenario 1

The Libyan revolution will spread to Algeria and the global oil market will experience a supply disruption amounts to about 3.5mn b/d, which if it happens would wipe out the Saudi spare production capacity and expose the world oil market to influential marginal events. If this scenario materializes, oil prices will jump to $150/B or more in a short period of time. Saudi oil can substitute of a disruption of Libyan and Algerian oil.

But how likely will this scenario take place? If you ask the Algerians about a revolution contagion spreading from Libya to Algeria, they will say that they had their revolution 10 years ago and paid dearly for it and the world did not care. Moreover, the Algerian government has been on the lookout and learned from the Tunisian and Egyptian revolutions. It has introduced enough reforms that should have blunted the revolution contagion. In my opinion, this scenario has a very low probability of happening and I can dare to dismiss it.

Scenario 2

The Bahraini revolution will spread to Saudi Arabia and disrupt 10% of world oil production. If this scenario materializes, oil price will jump to more than $200/B and the sky is the limit. But Bahrain has had a sectarian conflict between Shi'a and Sunni as far as I remember. I agree that the Shi'ite protests have gotten louder and stronger more recently. But it is very hard to completely overthrow a regime in the Middle East when the people of the same country are divided into two major population groups and where one of those groups’ benefits and supports the ruling regime, while the other is against the regime. This case also applies to Jordan and Yemen. Moreover, the Bahraini royal family is now much more flexible in dealing with the dissenting group. On the other hand, it is also supported by all the other GCC countries, which are willing to pay handsomely to pacify dissenting voices.

In my opinion, the conflict in Bahrain will continue and more reforms will shape up, but it will not reach a revolutionary level that will topple the royal regime and then spreads to the ‘big sister’. Saudi Arabia, which has 6,000 princes and princesses, has its own problems but those problems are not closely related to food and fuel prices. They are related more to social and political reforms. The people in Saudi Arabia are not starving and can receive compensation from the government even when they are unemployed. The king upon his return to his kingdom just showered them with ‘goodies’. Moreover, the Saudi youth are brought up differently than the youth in Egypt and Tunisia: they are taught from childhood to respect and obey authority according to “the teachings of Islam.” This scenario has a higher probability of happening than Scenario 1, but still its probability is low. I consider it not very viable.

Scenario 3

The Libyan revolution will not spread to Algeria and the Bahraini sectarian conflicts will stay Bahraini, there will be no Bahraini revolution that topples the regime and the ‘contagion spread’ will become contained. I agree the most with this scenario. I see the Libyan revolution to be the last successful Arab revolution at this time. The Arab youth have seen how the military in Tunisia and Egypt have cut both revolutions in half. They are now disillusioned and disappointed.

In this scenario, the WTI oil price should range between $110/B and $120/B. This price is likely to move in that range for some time. But eventually, it will start heading down to a docile $80-$90/B. Then the oil fundamentals propelled by the strengthening economy recovery will help the price break up gradually. But this scenario should not end before we will see more freedom and less oppression in the Middle East. The United States should start to think seriously on how to deal with future Arab democracies and reformed regimes. This future will bring new and different geopolitical thinking and requires an analysis on its own. I hope I will perform that task.