What will be the impact on financial markets of the revolution in Libya successfully overthrowing the country's dictator of 40 years? Prior to the war, Libya pumped out about 1.6 million barrels per day, but that has been reduced to about 100,000 during the conflict.

Here's a look at the top 20 oil producers in the world, with Libya coming in at #17:

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Most of that Libyan oil (85%) headed to Europe:

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Back in February when the rebellion in Libya started, we saw a sharp climb in oil prices as Libya's production was ground to a halt. This affected Brent crude more so than light crude, as Libya produces the former, but both saw prices rise in the subsequent months.

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The likeliest scenario now that we see the Qaddafi regime close to the end is that as Libya gets its production back online -and the rebels taking over will have every incentive to do so, and have already met with many foreign oil companies to get their expertise and help - we should see the big spread between Brent Crude and WTI Crude contract.

WTI light crude is almost back to its levels from October 2010, but as the chart above shows, Brent crude continues to trade near its levels from around this February, which was when the Libyan conflict began.

 

 

The pressure on oil price has been down recently, as investors and traders are concerned about global growth. If we have more supply enter the market, then Brent should ease further. Lower oil prices can help ease inflationary pressure, as Brent crude is used as the benchmark price for most of the world's oil consumption.

If oil prices decline more, that translates to lower gasoline prices and reduces the pressure of companies to pass through their rising commodity costs to consumers. That could mean that consumers from Europe to Asia, though the impact will be felt in America as well, will have more discretionary incomes with which to spend on goods and services, helping overall economic activity.

However, just getting oil production back online will take time, so any drops in oil prices in the short term will come more from the relief that end is near to the conflict, but not yet supply and demand factors.

From MSNBC: Brent crude fell as much as 3.2 percent to a low of $105.15 a barrel and later recovered to $107.05 as the dollar weakened. U.S. crude was up 0.9 percent to $83.03 a barrel after dropping to as low as $81.13. The front-month September U.S. crude contract expires on Monday.

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Michael Lynch, president of Strategic Energy & Economic Research, said that once Gadhafi is pushed out, Libya's new government could take the path of the Iraqis after the fall of Saddam Hussein and spend years fighting over every detail. Or it could follow Kuwait's example and quickly decide to bring in an outside company to get production restarted right away.

They do have a good cadre of educated people, but they don't have a long record of competent self-government, Lynch said. It would not be a bad bet to think there might be a chaotic period for a few months till they get organized.

It may take anywhere from 18 month to several years to get Libya back to pre-conflict output levels, depending on how much damage was done to facilities and how much new investment in infrastructure will be needed.

From Reuters: An official working for Libya's Arabian Gulf Oil Company (AGOCO), which has been operating the Sarir and Mesla oilfields under rebel control, said on Friday that output from its area could resume within three weeks.

Samuel Ciszuk, senior Middle East & North Africa energy analyst with IHS Energy, said oil output could theoretically be restored in 18 months but that this would be the most optimistic scenario. Once there is a degree of security for their personnel, it should not take too long for the oil firms to get their workers back in. If the money's right they will go back, said Mike Wittner, Societe Generale head of oil market research in New York. But it was difficult to assess how much damage had been done to oil facilities during the war, he said. No one really has a clear idea of how much damage to the oil infrastructure there has been ... Anytime you shut a field down quickly and run off in a panic there will be problems.

Foreign oil firms will be eager to head back into Libya once security is restored. Italian oil company ENI has already returned some of its personnel to the country.

From Reuters: Italy's Foreign Minister Franco Frattini said staff from Eni had arrived to look into a restart of oil facilities in the east of the country even as fighting between government troops and the rebels continued in Tripoli in the west. The facilities had been made by Italians, by (oil field services group) Saipem , and therefore it is clear that Eni will play a No. 1 role in the future, Frattini told state TV RAI.

We therefore look to see how quickly oil prices reflect these realities, and what impact that will have on the global economy.

Nick Nasad
Chief Market Analyst
FXTimes