The ever present threat of political unrest in the Middle East and North Africa

Ongoing turmoil in the Middle East and North Africa is likely to keep oil prices high for some time

Reports that troops loyal to Libyan leader Muammar Gaddafi bombed an oil field south of the city of Ajdabiya on 4 April drove the most widely traded future contract for oil to its highest level since 24 September 2008.

The ever present threat of political unrest in the Middle East and North Africa has been driving up the price of oil all year; at the end of 2010 the oil price was hovering around the $90 level, since when we have had enforced changes of government in Egypt and Tunisia, political unrest in Bahrain and Saudi Arabia plus a civil war in Libya.

Libya, once the world’s 17th largest oil producer, churning out 2% of the world’s oil, has virtually ceased producing oil as the conflict heats up, with output reportedly hitting a 49-year low.

Saudi Arabia has committed itself to pick up the slack while Libya is unable to produce its usual quantities of oil in an attempt to stabilise the oil price and head off the possibility of a global double-dip recession.

Saudi oil minister Ali al-Naimi said on 8 March that the country had developed two blends of oil that approximate the type of oil that is normally supplied by Libya.

He added that the kingdom has enough spare capacity to ramp up oil production by around 3.5m barrels a day.

Saudi Arabia’s commitment to raise production initially had a stabilising effect on the oil price but it did not last, and that may be because, according to a survey conducted by news agency Bloomberg, output in March from the Organisation of Petroleum Exporting Countries (OPEC) fell by 363,000 barrels from February’s level, to 29.02m barrels a day.

OPEC is certainly showing willing, judging by comments from Ali Al-Yabhouni, the United Arab Emirates (UAE) OPEC governor, who said at the end of March that “OPEC members stepped in with a sizeable increase from Saudi Arabia, UAE, Kuwait and Angola.”

According to Al-Yabhouni, even with Libya’s output levels plummeting “there is plenty of oil in the market.”

That view was backed up on 3 April by Iran’s oil minister, Masoud Mirkazemi, who said he saw no need for OPEC to hold an extraordinary meeting to address high oil prices.

If there is still plenty of oil in the market, then why is the oil price still surging?

In Mirkazemi’s view, the slumping value of the US dollar is as much to blame for the high price of oil as the civil unrest in oil producing countries.

It seems probable, however, that the market is factoring in more bad news from North Africa and the Middle East in the coming weeks, just to be on the safe side. 

The Libyan conflict is already in its sixth week and anyone who hoped that the intervention of the United Nations (UN) would bring a speedy termination to the fighting has been disappointed, though there are reports that UN-sanctioned air strikes have prompted Libyan leader Muammar Gaddafi to seek a diplomatic solution that will involve him leading a transition to a democracy in Libya.

Until such time as the Libyan war is over and the threat of unrest spreading to other oil producing countries recedes, the world will have to get used to sky high oil prices.