Quadaffi’s Death to Pave Way for Lower Oil Prices

When Libyan citizens launched a revolt against Moammar Quadaffi earlier this year, the nation’s oil exports ground nearly to a halt, driving up oil prices in the process. With Quadaffi’s death on Thursday, the road is cleared for the nation to crank its output back up, which could lead to lower oil on international markets, and thus lower gasoline prices at American gas stations.

Libya is a major producer of light, sweet crude oil, a very rare type of oil that is particularly valuable because it is easier to convert into gasoline and diesel fuel. And switching from processing light, seet crude to other types of oil is a very costly, time consuming process that refineries are hesitant to undertake. Before the civil war began in Libya, the nation produced about 2 percent of the world’s oil. While that sounds like a small percentage, even minor disruptions in supply can have a major impact on price because the balance between supply and demand is very delicate.

When incidents occur like the Libyan revolt, oil traders get nervous about supply, and prices go up rapidly. Between February 15th, when unrest began in Libya, to April 29th, oil prices rose 35 percent to a per barrel price of $114, the highest level seen since the summer of 2008. Over that span, average gas prices in the US rose from $3.12 before the unrest began to a three-year high of $3.98 a gallon.

When the fighting escalated, fear that Libyan crude would disappear from the market sparked a group of oil-importing nations to announce the release of 60 million barrels of emergency reserves, including 30 million barrels from the US. The price of oil began to go down then, as traders believed the new release of reserves would hold the market over until Quadaffi could be overthrown, after which they believed Libya’s production would return to normal.

The immediate impact of the dictator’s death will be minimal, insiders say, because efforts to revive Libya’s production have been underway for months by the Libyan transitional government. But insiders say that the leader needed to be killed or captured before the country’s production can return to pre-revolt levels. Before the unrest began, Libya was producing 1.6 million barrels a day. Currently, that production is only at 390,000 barrels a day,a figure analysts predict will rise to 600,000 bpd by year’s end. Furthermore, analysts predict the nation will be all the way back to pre-revolt production levels by the middle of next year.