Can Saudi Arabia Really Compensate for Libyan Oil Shortages?

How quickly we’re made the fool these days. Yesterday, we speculated Libya’s oil output had fallen to 75% of normal.

This morning, it appears the number has already fallen to 25% of capacity. The output estimate comes from the CEO of the Italian oil giant Eni, the largest foreign operator in Libya.

Muammar Gaddafi

Down to 25% of capacity… and the “Mad Dog of the Middle East” hasn’t even carried out his threat to detonate the nation’s pipelines to the Mediterranean yet.

And just like that, West Texas Intermediate crude broke through the $100 barrier. It’s currently $101.41 a barrel. Brent crude is up to $115.28.

Not to worry, says an unnamed “Saudi Arabian oil official” to Bloomberg. “Saudi Arabia and OPEC won’t allow shortages to exist,” reads the story, because they can “replace any lost Libyan oil as soon as companies ask for it.”

Apparently, we’re supposed to forget the WikiLeaks revelation from just two weeks ago that Saudi Arabian reserves may be 40% smaller than advertised. Likewise, we’re supposed to forget that their vaunted “spare capacity” never seemed to come into play as oil ran up from $25 to $147 between 2003-08.

Besides, the 6,000-some Saudi princes have bigger things to worry about right now.

Saudi Arabia’s octogenarian King Abdullah has just returned home from three months of unspecified “medical treatment” overseas in hopes he’ll avoid the fate that’s already befallen Tunisia’s Ben Ali and Egypt’s Mubarak.

He’s unveiled a Saudi-style stimulus program worth $36 billion, including…

  • A 15% pay increase for government employees
  • Reprieves for imprisoned debtors
  • More aid for students and the unemployed – the official unemployment rate is 10%.

Not good enough, say some of the young, hip Saudi Arabians using Facebook to organize a “day of rage” on March 11. “We want rights, not gifts,” says a typical message on Twitter.

Into this new and volatile mix we feel compelled to throw a couple of old facts: The House of Saud hews to Sunni Islam. The country’s oil fields are populated mostly by Shiites. Between the two factions lies a rift going back 1,354 years.

That’s what’s at the heart of the “New War” scenario of $220-a-barrel oil from Outstanding Investments editor Byron King. Just yesterday, Japan’s Nomura Securities called for exactly that price if production is shut down in Libya and Algeria. We’re almost there already in Libya.

Addison Wiggin
for The Daily Reckoning