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Saudi Arabia replacing Libyan oil production for moment, but worries remain

ISTANBUL - Hürriyet Daily News | 3/7/2011 12:00:00 AM | SAMUEL DOVERI VESTERBYE

Oil shortages in Libya remain only a minor problem for the moment as Saudi Arabia compensates for production, but experts are worried about further disruption, as spare capacities only reach so far. Experts note that situation in Libya could resolve itself, while further revolts in the region, especially Saudi Arabia itself, could seriously damage import security globally

Saudi Arabia has increased oil production following a dramatic drop in Libyan exports, but some have worried that the uprising that has swept the Arab world could also affect the desert kingdom, greatly disrupting oil supplies.

“Our estimates about Libya range between 800,000 to 1 million barrels a day being lost, but Saudi Arabia has been constructive and responsive, while our reserves at the IEA [International Energy Agency] are substantial,” Fatih Birol, the chief economist at the IEA, told the Hürriyet Daily News & Economic Review last week.

“The IEA’s 1.6 billion barrels alone mean that 2 million barrels per day can be exported for two years without interruption in case of an emergency,” Birol said.

Saudi Arabia has avoided the turmoil seen in other oil-producing states like Bahrain and Iran, but experts fear that further dependence could prove fatal in the event of unforeseen disruption.

With increased reliance on Saudi Arabia as Libyan exports run dry, “the risks are very high because disruption in Saudi oil production would lead to devastating effects,” Mert Bilgin, an energy expert and academic at Istanbul’s Bahçeşehir University, told the Daily News.

[HH] Italy to be especially affected

Recent Libyan revolts have taken its toll on oil prices with West Texas Intermediate, or WTI, reaching levels around $104 per barrel, while Brent Crude peaked at $116 on March 3.

Fears of a civil war and total oil disruption have led to dramatic oil hikes and speculative markets, while experts remain divided over risks associated with Libya and further Saudi dependence.

“Saudi Arabia is capable of increasing spare capacity, but everything would then rest in their hands,” said Necdet Pamir, a board member on the Turkish National Committee at the World Energy Council.

“Maximum spare capacity is available, but unrest in Saudi Arabia is a major risk,” he told the Daily News.

With a production drop from Libya ranging somewhere between 500,000 and 1 million barrels per day, European importers have faced serious difficulties, with Italy depending on Libyan exports for one third of its oil.

Concerns have ranged from the quantity to the quality and type of crude oil being particularly unique in Libya, while other problems include delays from other countries to replace Libyan exports.

“Saudi Arabian oil has had difficulties in replacing Libyan crude, which is very light and sweet,” said Bilgin.

“Another problem includes delays, since crude tankers from Saudi Arabia to the Mediterranean will need 11 days, which can be difficult for countries like Italy,” he said.

[HH] ‘Libya is dispensable,’ say experts

Other experts have said the Libyan slowdown is fully manageable given Saudi Arabia’s spare capacities and IEA reserves.

“Speculators are using an unfortunate geopolitical moment, but it is important to remember that OPEC [Organization of the Petroleum Exporting Countries] is capable of managing the situation, [while] 2.5 to 4 million barrels a day are available from Saudi Arabia,” Pamir told the Daily News.

“New production can be completed in a few days while price reductions become immediate,” he said.

With commercial stocks, Saudi oil and the IEA’s support, Libya will still be replaceable in terms of quantity, according to Manouchehr Takin, a senior oil analyst at the Global Center for Energy Studies.

“Even if Libya were to halt exports for six months, the world would manage with spare capacities from Saudi Arabia,” he told the Daily News.

[HH] Increased Saudi dependence could prove fatal

The Saudi risk assessment comes as the internal dynamics could prove unstable, while other concerns include its increasingly overarching role as the main provider and price stabilizer during recent unrests.

With limited diversification and increased reliability on Saudi Arabia, experts fear that the situation could become more dangerous for dependent importers.

With unrest in the area, there would seem to be a significant chance of an uprising in Saudi Arabia, either in response to a nearby uprising, or if King Abdullah's health condition deteriorates, according to Gail Tverberg, an energy specialist and writer at the Energy Bulletin.

“Although Saudi Arabia can cover the reduction in Libya production, further reductions in supply could spread beyond Libya, leaving Saudi Arabia incapable of keeping up,” Tverberg told the Daily News.

“If the situation deteriorates to the point where a significant share of foreign oil workers leave, there could be a problem in Saudi Arabia as well, because workers are so specialized, and cannot be easily replaced,” she said.

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