Oil pressure rising, oil surges again
Stocks sank for a second consecutive day in tandem with oil prices surging to 28-month highs as continued turmoil and violence in Libya shatters traders nerves.
Oil futures in New York closed at just under $99 per barrel (having reached the $100 level earlier in the day), the highest such close since October 2008. Oil production in OPEC member Libya has been disrupted by what appears to be a gathering civil war in that country. The Dow Jones Industrial Average dropped 107.01 points, or 0.88 percent, to 12,105.78. The S&P 500 tumbled 8.04 points, or 0.61 percent, to 1,307.40. The NASDAQ composite slipped 33.43 points, or 1.21 percent, to 2,722.99.
Oil pressure rising
A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $111. Little wonder. The region provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d).
So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil companies operating in Libya would stop some production and that the country’s ports had temporarily closed. As Adam Sieminski of Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations.
Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) have added 16% to oil prices. But the big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.
Oil is more global than it was during those previous crises. In the 1970s production was concentrated around the Persian Gulf. Since then a gusher of non-OPEC oil has hit markets from fields in Latin America, west Africa and beyond. Russia overtook Saudi Arabia as the world’s biggest crude supplier in 2009; OPEC’s share of production has gone from around 54% in the mid-1970s to just over 40% now.
Yet the globalisation of oil supply has not diminished OPEC’s clout as the marginal supplier of crude. Markets are tight at the moment. Bumper inventories, built up during the downturn, are running down as the rich world recovers and Asia puts on a remarkable growth spurt. Demand rose by a blistering 2.7m b/d last year, according to the International Energy Agency, and is set to grow by another 1.7m b/d this year by Deutsche Bank’s reckoning. Many other producers are already running at full capacity; OPEC has its hands on the only spare oil (see chart).
If Libya’s oil stopped flowing importers would look to Saudi Arabia to make up the shortfall. The oil could probably flow to fill the gap in Europe, Libya’s main market, in a matter of weeks. OPEC claims that it has 6m b/d on tap but that looks wishful. Analysts think the true number is nearer 4m-5m b/d, with 3m-3.5m b/d in Saudi hands. That is ample to plug a Libyan gap but would hasten the day when growing world demand sucks up all spare production capacity and sends oil prices rocketing. Analysts at Nomura reckon that it would only take a halt of exports from Algeria as well to absorb all the slack and propel oil to a terrifying $220 a barrel.
Despite rising prices, Saudi Arabia has so far been reluctant to turn its stopcocks. OPEC claims that the world is amply supplied with oil and seems content with a price around $100 a barrel. Traders hope that Saudi Arabia will boost production stealthily or that OPEC will call a special meeting to raise quotas and calm markets.
The worst-case scenario for oil prices would be some kind of disruption to Saudi supply itself. That concern has become livelier given the unrest in neighbouring Bahrain. The tiny island kingdom produces little oil but is of vital strategic importance in the Persian Gulf, a seaway that carries 18% of the world’s oil. America’s 5th Fleet, which polices the Gulf against troublemakers (ie, Iran), uses the country as a base.
The Saudis may also fear that protests by Bahrain’s Shia population could spill over their own borders. Saudi Arabia’s eastern provinces are home to both its oil industry and most of its Shias, who may also have cause for grievance with their Sunni rulers. One crumb of comfort is that oil facilities across the region are generally located far from the population centres, where protests tend to be concentrated, and are well defended against anything but a concerted military assault.
Building stockpiles
What might be the effects of a more general supply crisis in the Middle East and north Africa? The oil shocks of the 1970s spurred the world to build stockpiles, such as the 750m barrels of crude oil in America’s strategic petroleum reserve, to be drawn on in the event of upheaval in the Middle East. China is building a strategic reserve of its own. America’s Energy Information Administration puts total world stocks in the hands of governments and industry at an immense 4.3 billion barrels, equivalent to nearly 50 days of global consumption at current rates.
The impact of a crisis would therefore depend on how much oil production was lost and for how long. Even seismic shocks in oil-producing countries might not cut off supplies for very long. Yet the example of Iran shows what can go wrong. Leo Drollas of the Centre for Global Energy Studies, a think-tank, points out that pre-revolutionary Iran pumped 6m b/d. The new regime ditched Western oil experts and capital, and it has never come close to matching that level of output since; it now produces just 3.7m b/d. Middle Eastern oil is largely state-controlled but, as Amrita Sen of Barclays Capital observes, foreign investment remains vital to north Africa’s oil industry. If new regimes emerged that were more hostile to outsiders, that might have a lasting effect on production.
The world could probably weather a short-lived crisis. But the damage if oil prices spiked and stayed high for a long time could be great for the recovering economies of the rich world. As for the prospects of reducing the importance of the Middle East to global oil supplies, forget it. Strong Asian demand is likely to mean that OPEC’s share of oil production rises again as it pumps extra output eastward. A troubled region’s capacity to cause trouble will not diminish.
Benghazi becomes Libya's first free city
Gaddafi in hour glass
The first foreign journalist to reach Benghazi sees how Muammar Gaddafi's bid to cling to power has failed
At the heart of the city where he launched his rise to power, Muammar Gaddafi's indignity is now complete. In little more than three days of rampage, the rebels in Libya's second city have done their best to wind the clock back 42 years – to life before the dictator they loathe.
Benghazi has fallen and Gaddafi's bid to cling on to power, whatever the cost, has crumbled with it. There is barely a trace of him now, except for obscene graffiti that mocks him on the dust-strewn walls where his portraits used to hang.
Residents who would not have dared to approach the town's main military base without an invitation were doing victory laps around it in their cars. Every barrack block inside had been torched and looted. The stage where Gaddafi would address the masses on the rare occasions that he came here had collapsed. His house across the road had been ransacked and there wasn't a loyalist soldier inside.
"He is gone. A dragon has been slain," cried Ahmed Al-Fatuuir outside the secret police headquarters. "Now he has to explain where all the bodies are."
The Middle East's longest ruling autocrat seems disinclined to do that, or to go quietly. His rambling speech on Tuesday night, in which he vowed to die in his homeland as a "martyr", has convinced many in Benghazi that although they may have ousted their foe from eastern Libya, they have not seen the last of the bloodshed.
At the city's hospitals, administrators are still tallying the toll from the most savage fighting seen here in decades. At the al-Jala hospital, at least 65 deaths have been recorded since 17 February, along with dozens of injuries, many of them horrific. And they are still coming in.
A Libyan soldier, who along with many of his colleagues had joined the anti-government insurgency, was pronounced dead as the Guardian arrived inside the overworked intensive care unit. A small bullet wound near his right kidney had caused irreversible chaos inside his body.
"They are still out there," said the doctor who pronounced him dead. "These mercenaries who are hired by Gaddafi are lurking in the shadows."
Wherever they are hiding, they must be running out of arms. All day yesterday, defecting troops and officers were lugging in thousands of pounds of ammunition to a courtyard inside the secret police headquarters on Bengazi's waterfront. By the day's end an arsenal that could easily supply an army brigade was piled up. There were plastic explosives, rockets, machine guns and even the anti-aircraft weapon that was used to mow down demonstrators as they assaulted the military base on Sunday.
Evidence of the carnage it caused was clear on the walls of nearby buildings and in the mortuaries. Doctors had used their mobile phones to capture the carnage that was caused by military weapons on human flesh. And they coolly displayed the aftermath of the battle, denouncing Gaddafi as a criminal as they did so.
Nearby Filipino orderlies were putting the finishing touches to the short life of a dead soldier, washing his body with a clinical calm and slowly readying a green body bag. It was a process they were clearly familiar with. " Too many times, too many times," said one orderly as he rested on a trolley. "It has been terrible in here."
At least 232 demonstrators in Benghazi are believed to have been killed since the uprising began and up to 1,000 injured. There are no reliable figures on the number of soldiers or mercenaries killed during the assault of the barracks, or in the hours of chaos that followed.
One thing that is clear is that this was not a peaceful stroll through the streets of Bahrain, as has largely been the case on the other side of the Arabian peninsular. This was a savage rampage on both sides, a blood and guts revolution, fuelled by decades of repression, neglect and rage. There has been nothing peaceful about it.
Testimony to the protesters' vehemence is dotted all around the base, in the form of bulldozers stolen from nearby worksites that were used to breach the walls. At least six of them stand burned and mangled near where their work had been successfully done – gaping holes in whitewashed walls that allowed protesters to storm through.
"That is where the anti-aircraft gun was and that is where all the African mercenaries were found dead," said Mohamed Fatah, who was part of the throng that attacked the base. "The people were leading a funeral march past the big roundabout and people from inside the base opened fire," he said. "They went home, gathered themselves and came back. This is what happened."
Gaddafi's reported use of mercenaries appears to have tipped the hand of many protesters and armed forces. "That is why we turned against the government," said air force major Rajib Feytouni. "That and the fact that there was an order to use planes to attack the people."
Workers at an oil refinery 120 miles west of Benghazi said that they had seen an air force jet crash nearby and two parachutes land. There were widespread reports that those on board had refused to carry out an order to attack the east of the country.
The reports could not be independently verified. However, Feytouni confirmed that an air force base to the east had been hit on Sunday by two bombs dropped from a jet. "They were trying to make sure that the weapons did not end up in the hands of the opposition," he said.
He added that he had personally witnessed 4,000-5,000 mercenaries flown into his air force base on Libyan military transport planes, beginning on about 14 February – several days before the uprising started.
"They [the planes] had 300 men at a time, all of them coming out with weapons," he said. "They were all from Africa: Ghanaians, Kenyans."
Several of the alleged soldiers of fortune are being held in a jail at the top of the ransacked courthouse on Benghazi's corniche. One was briefly brought to meet the Guardian. He was quickly ushered away by lawyers who said he was not allowed to speak until the case against him was finished.
But the court of public opinion on the heaving street below had already convicted the unnamed African, along with anyone else linked to what they believe are the dying days of 42 years of sadistic oppression. There was no sign of any pro- regime figures. And even those who have recently defected, such as the country's justice minister, are not prepared to show their faces publicly, fearing the reactions from a combustible street.
The mood of people fluctuated easily between nervousness and violence; warmth and zeal. The first western reporters seen in the city since law and order collapsed were embraced almost as liberators. At some points during the morning and at the hospital, it was difficult to move without people eagerly thrusting in our faces more macabre images of dead people or missing relatives.
"His time will come," said one man brandishing a simple sign that said in English: "Freedom for Libya". He added: "You are welcome here. The world needs to see what is happening."
Along the long and winding way from the Salum crossing from Egypt, there was not an official to be seen.
Neighbourhood Watch-like groups, all armed with AK-47s, manned checkpoints in and out of all the towns. But every military and police post for 360 miles had been abandoned. The scattering of the police was leading to claims of victory and the feeling of triumphalism among many of the city's young people.
The deathly emptiness of a rainy morning in a city under siege had by dusk given way to teaming streets and jubilant cheers. Celebratory burst from AK-47s cracked into the air thoughout the afternoon – always a disconcerting sound in a war zone.
The jubilation did little to hide Benghazi's wounds, though. Here, more than in the capital, Tripoli, or Gaddafi's other strongholds, mainly in the west, society remains brutalised and stagnant, a drab decaying old-order feel, much like Iraq in 2004.
"Here hospitals are nothing like in Tripoli," said an intensive care nurse who identified herself as Fatima. "It is first world there, but we have to make do."
It's the same with government buildings – what remains of them. There is barely a typewriter left, let alone a computer or the basic tools of administration.
Neglect had been a clear strategy for Gaddafi for a city that had in 1969 deeply resented the coup he launched against the monarch, King Idris, and has not forgiven him since. The independent flag last flown 42 years ago has become a prominent symbol of this revolution. It flies above key government buildings and even hospitals and it is worn as a badge by most organisers.
Benghazi feels Libya's time has come. Residents are adamant that the leader who forgot them has days, or perhaps weeks, left as president. "He can't survive and he won't survive," one man shouted outside the courthouse. "He is deluded and he is cruel. He will attack us again even though everyone knows he is finished."
The city has little sense of what is happening in the west of the country where Gaddafi still appears to be in control of at least large parts of the capital.
Meanwhile, many of the 1.5 million foreigners still in Libya are scrambling for the border, or waiting from help from their governments. Several passenger ferries are waiting in the choppy waters off the coast of Benghazi for any evacuation order. And the Salum border crossing to Egypt is a chaotic scramble of fleeing Egyptians who overran the arrival hall on Tuesday evening as the Guardian was trying to enter Libya. Riot police were moved into position but weren't used.
The international community again appears hamstrung by the man it had spent decades trying to rehabilitate. Leverage is limited and options are few.
"The people of the international community had been helping their governments to help the assassin," said an orthopaedic surgeon, Dr Shakir, in al–Jala hospital. "And that only because the assassin and his government is helping them. That is a flawed logic."
So far reactions to the gathering storm here, which may soon lead to the overthrow of the third Arab autocrat in less than three months, has been to renounce the volatile leader and the compulsive savagery he is launching as his legacy melts away.
But there remains a gnawing fear that the worst may be yet to come. "Of course it is true," Saad Achmed, a 24-year-old student, said. "If he feels he is cornered he will come for us. Those roads you came in on may be clear, but you did not see who is hiding over the hills? We have won the big battle, but that does not mean the war is won just yet."
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