CORRECTION: An earlier version of this story misstated how far Chris Lafakis expects gas prices to fall. He expects them to drop below $3.50 per gallon this week.
It may seem like eons ago, but way back at the start of 2011, the U.S. economy appeared poised to shrug off its post-recession shackles and speed toward 4 percent annual growth. Then protests erupted across the Middle East, punctuated by a civil war in Libya that choked oil production and sent global crude prices skyward. Gasoline prices spiked across America, and the recovery began its dive back toward a possible double-dip recession.
In other words, an oil shock fueled in part by Libyan unrest gave the U.S. recovery its first – and perhaps biggest – shove away from “breakout” and toward “breakdown." Now that Libya’s civil war appears near its end, could the reverse be true? Could a restored flow of Libyan oil push crude prices down and give the global economy a much-needed lift?
Don’t get your hopes up, several economists say.
“It would be a mistake to expect too much too early from these developments,” said James D. Hamilton, an economist at the University of California-San Diego who has studied the history of oil shocks extensively.
Hamilton said history suggests that oil production can be slow to return after a revolution – in Iran, for example, it took years to revive the oil industry after the fall of the Shah. Also, consumers are quick to contract spending in the face of rising oil prices, but much slower to resume when prices fall: “The historical evidence is when oil prices can go up, they can cause the economy to stumble,” Hamilton said. “But when oil prices go down, the stimulus benefits are a lot less dramatic.”
Mike Montgomery, an economist with IHS Global Insight in Lexington, Mass., said it’s tough to predict much impact on global oil prices from the end of fighting in Libya, because it’s unclear how much damage the country’s oil infrastructure has sustained. The answer to that question could sway the oil market in either direction, by raising or reducing hopes for ramped-up Libyan production anytime soon, he said.
“I don’t think the damage or benefit is likely to be overwhelmingly large in either direction,” Montgomery said. “We’ve just got no clue in which direction it’s going to be.”
A few analysts are more hopeful.
Oil and gas output can reopen in Libya before winter, the Italian oil company Eni SpA, the largest foreign producer in Libya, told reporters on Monday, according to Reuters.
Frank Verrastro, senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies, said on Monday that Libyan production could come back up by 400,000 to 500,000 barrels a day within six months. Once stability returns to the country, oil companies such as Eni would have to go back in and assess the damage to their infrastructure.
The second piece of the puzzle, Verrastro said, is governance. While rebel forces may have been united in getting rid of Qaddafi, the existence of a stable and unified transitional government is just as crucial to companies. “Will their people be safe? Companies want to know,” Verrastro said in an interview.
Samuel Ciszuk, senior Middle East and North Africa energy analyst with IHS Energy, said that barring any serious damage to infrastructure – and assuming some degree of political stability – Libyan production could be up to 1.2 million barrels a day by this time next year. Depending on policies and infrastructure, the country could potentially produce 250,000 to 300,000 barrels a day within three months, he added. “It will surely ease a lot of the worries” over crude supply, Ciszuk said.
Before the fighting, Libya produced 1.6 million barrels of oil per day. There figures to be enormous pressure on Libya’s new leaders to resume production quickly: In 2010, 92 percent of the nation’s government revenues came from oil and gas.
Ramped-up Libyan oil production could lead to less pain at the pump, said Chris Lafakis, an economist at Moody’s Analytics.
“Every dollar decline in the price of oil gives consumers an extra $3 billion” per year to spend, save, or use to pay down debt, primarily through lower gasoline prices, he said. Lafakis expects gas to fall below $3.50 per gallon this week: “We’ll be getting some relief at the pump fairly soon.”
Brent crude, which is used to price a number of oil varieties internationally, fell by more than a dollar per barrel on Monday. U.S. crude prices, on the other than, rose by less than a dollar.
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