It would seem it doesn't take much more to calm the oil markets than it does to roil them.
Oil spiked when protests in Libya, an OPEC member, turned into a full-scale revolt against Moammar Ghadafi's brutal regime. Foreign technicians fled the country, which is a serious problem, because Libya doesn't have enough trained personnel to ensure that the taps can be kept open.
But Saudi Arabia's top oil industry executive, Khalid Al-Falih, joined with Saudi officials Monday in assuring that the state-owned oil company stands ready to fill any gaps in world supply. At about the same time, some tankers managed to load their Libyan oil cargo without incident. In response, oil erased its gains for the day, and central bankers everywhere breathed a sigh of relief.
It is destined to be temporary. Oil will remain stuck on the price roller-coaster, because of the clouds of uncertainty that will continue to hang over the market.
Let's take the Saudi promise, for a start. Some analysts insist the Saudis have little spare capacity. But others say it exists. Prominent oil economist Philip Verleger, a business professor at the University of Calgary, estimates that total excess capacity amounts to between 4 million and 5 million barrels a day. But that doesn't mean one barrel of Saudi crude can automatically replace one barrel of Libyan at the refinery level. The stuff the Saudis have withheld from the market is mostly heavier sour crude.
European refiners use Libya's light sweet crude to make diesel fuel, which was in short supply even before Col. Gadhafi went ballistic on his own people. To get a metric ton of ultra low-sulphur diesel out of sweet crude requires the removal of about 3.5 kilos of sulphur. But Saudi heavy oil contains far more sulphur - 176.5 kilos per ton. That means a lot less fuel per barrel. "It's that ratio -- 3.5 to 180 -- that just kills refiners, even though more desulphurization capacity is being built," Prof. Verleger says.
Put another way, refiners can get close to 80 litres of diesel out of a Libyan barrel, but only about 30 litres out of the oil the Saudis have been keeping in reserve.
There is also a risk of social unrest spreading through other autocracies, putting further supplies at risk. No one can guarantee that shaky regimes won't tumble throughout the Gulf region. But the likelihood is small. Political experts paint a more likely scenario of the Saudis intervening to prop up rulers in neighbouring Bahrain and other small states.
As for Saudi Arabia itself, don't discount the value of large cash bribes - officially billions in new social security spending - to reduce discontent. King Abdullah is still a revered figure. But he is 87 and in frail health, and his immediate likely successors are ancient too. The long-time alliance between the Saudi royals and religious authorities ensures that there will be no trouble from Muslim radicals. And strong tribal allegiances are involved as well. There's a reason, after all, that this particular family has held the reins of power for so long. And if all else fails, there's always the U.S. Navy, whose 5th Fleet happens to be based in Bahrain.
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