Wednesday, March 2, 2011

Europe & Libyan Oil

Libya only provides approximately 2% of the world's oil.  As such it will have little effect worldwide except as this disruption moves the Brent Oil price up as it has supply.  Saudi Arabia has indicated it will pick up production to compensate for Libya, but it unknown whether this will happen.   Saudi oil is heavier and more expensive to refine.

According to Libyan sources, in 2006 Italy was Libya's biggest customer buying 38% of Libya's oil exports followed by Germany with 19%.  By 2010, that had changed to Italy 28%, France 15%, China 11%, and Germany and Spain each 10%.

In looking at dependence on Libyan oil as a percentage of total oil imports in 2010, Ireland has the most dependence despite its small import amount of barrels followed by Italy (with the largest number of barrels), Austria, Switzerland, France, Greece, Spain, and Portugal.  Looking at early 2011 data, Ireland was importing 23.3%, Italy was importing 22% of its oil from Libya, and Austria was importing 21.2%.

While oil prices should only impact as short term head line inflation, the eurozone is overly reactive to headline inflation as opposed to sticky core inflation.  Eurozone Producer Price Index (PPI), which is wholesale inflation, gas up 13% in January and factory gate prices were up 6.1% versus a year ago (up 5.3% in December).  While most people are concerned about headline (short term) inflation becoming higher future inflation, these high oil prices could actually be longer term deflationary as families buy less gas, buy fewer cars, and businesses curtail expenses in the face of higher commodities and slowing sales.  Such a deflationary scenario would quite likely cause a double dip.

With increasing turmoil in Yemen and Oman, and continuing turmoil in Tunisia and Bahrain, which has the largest concentration of financial institutions in the Middle East, oil is going up more on crisis speculation than actual supply and demand.

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