With Gaddafi gone, what next for oil prices?

Will the fall of Gaddafi's regime in Libya lead to an increased supply of oil or will the rebels' victory prompt further unrest in oil-producing nations, further constricting supply?

As Muammar Gaddafi's regime crumbled this week with the rebels' advance on his compound in Tripoli, the markets' focus was on a recovery of Libya's oil supplies. Before the civil war began in February, Libya produced 1.6 million barrels of oil a day (b/d), but the conflict has reduced the figure to around 50,000 b/d. It contributed 2% of global production in 2010. Before the war, oil and gas made up 25% of Libya's GDP.

What the commentators said

For Libyans, the end of Gaddafi's regime "comes about 40 years too late", said James Saft on Reuters.com, but "from the point of view of the global economy, it is not a moment too soon". It should lower energy prices and temper inflation. Both these factors have been undermining growth by choking off consumer demand. Analysts reckon that the loss of Libya's oil output has added a risk premium of $10-$15 a barrel to the oil price, said Liam Pleven in The Wall Street Journal.

Note, however, that the oil price didn't fall sharply when news of the Libyan endgame filtered through, said Andrew People and Liam Denning in the same paper. The near-term trend in oil prices should be downward, given the poor global macroeconomic backdrop and higher production in Saudi Arabia. Saudi output reached a 30-year high last month as it churned out more oil to make up for absent Libyan supplies. But don't expect a collapse in prices. The rebels have been united in their determination to get rid of Gaddafi, but now that they've achieved that, "dangerous fissures in their ranks" are a distinct possibility.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The last Iraq war showed that "how effectively the peace can be policed will be vital to a rapid restart in production", said Lawrence Eagles of JP Morgan. Political chaos in Iraq prevented output from reaching pre-war levels for five years. With the political outlook in Libya murky, estimates for production vary widely. Oil consultancy Wood Mackenzie thinks it could take three years for it to regain pre-crisis levels.

In the meantime, the fall of Gaddafi could give democracy movements in other oil-producing countries "a shot in the arm", said Ian King in The Times. Turmoil in Iran, a much bigger producer than Libya, would send prices far higher. The liberation of Libya might thus set the stage for another supply scare in the oil market.