When the Bombs Get Closer To the Oil
Hopes that a Venezuela peace plan could save the global oil market were dashed when reports that Moammar Gaddafi loyalists for the second day in a row bombed Brega, a main Libyan oil port, emerged. Rebels successfully defended the city yesterday and the oil was still flowing, yet the proximity to a major Libyan oil instillation has the market risk moving substantially higher. The Libyan Opposition has been inventive using alternate routes to get the precious oil out yet conflicting reports about the totality of Libyan oil production is keeping the market less then comfortable. Now with Gadhafi turning Brega into theater of war, the market obviously cannot count on the reliability of that supply.
To understand the importance of Brega and Gadhafi's attempt to try and get it back, I would refer you to the “World Port Source.” According to the World Port Source, "Port Marsa El Brega lies on the shores of Libya's Gulf of Sirte. About 200 kilometers southwest of the Port of Benghazi, Port Marsa El Brega is at the most southerly point of the Mediterranean Sea. In 2003, about 12 thousand people lived in Port Marsa El Brega. Port Marsa El Brega's reason to exist is the oil refinery there, owned and run by a subsidiary of the state-owned National Oil Corporation, Sirte Oil Company. Run in partnership with Esso Oil during the 1960s and 1970s, the Sirte Oil Company has had control of the Port Marsa El Brega facilities since the early 1980s. Before World War II, the site of Port Marsa El Brega was simply a small fishing village. During the war, the village was completely destroyed. After the war, the area was a field for land mines until it was selected to be the terminal for the country's first oil pipeline running 169 kilometers from Zaltan to the south. The new town and Port Marsa El Brega were constructed in the early 1960s from prefabricated materials. The new Port Marsa El Brega consisted of breakwaters, a wharf, undersea pipelines, and floating berths for oil tankers. The town contained a power plant, paved streets, housing, and a generous planting of trees to hold back the desert. Oil was first shipped from Port Marsa El Brega in 1961, leading to the creation of a refinery and a natural gas liquefication plant. In 1977, a plant for processing ammonia opened. Today, Port Marsa El Brega is becoming Libya's most important petrochemical center. It contains a technical training school, and it is connected to the Ports of Tripoli and Benghazi and Cairo, Egypt, by coastal highway."
With bombs and fighting near these facilities, the possibility for a disaster remains high. If a petro chemical plant or a refinery gets hit, it could spread further devastation and give a jolt to the global oil market again.
The Arab League is desperate for any solution and was even considering a peace proposal from Venezuelan President Hugo Chavez. As reported by Reuters and the Al-arabiya News Channel, "Venezuela's President Hugo Chavez has called for an international mediation effort to seek a peaceful solution to the uprising against Libyan leader Gaddafi. Chavez spoke to Gaddafi on Tuesday and laid out his proposal to seek a negotiated solution to the violence in Libya. According to Chavez, discussions were underway with left-wing Latin American nations and countries in Europe and South America with hopes that a commission could be established to go to Libya for talks with the Libyan government and the leaders of the opposition. Sources revealed the Libyan leader and the president of the Arab League Amr Mousa agreed to a peace plan. The Venezuelan President added it was better to seek a political solution rather than send marines to Libya, and better to send a goodwill mission than for the killing to continue."
The Reuters report went on to say that Chavez, "criticized the US which has said it is ready to enter Libya accusing it of wanting Libya's oil similar to the period where they were after Iraqi oil. Nicaragua and Cuba agreed with the thesis. Chavez highlighted that the door is open to all the 'friendly' nations. Chavez is a very close friend of the Libyan leader and praises him as a fellow revolutionary. He has made six visits to Libya since he became Venezuela President in 1998 and he believed it would be hypocritical of him to join international condemnation of Gaddafi now. Chavez accuse the US and some countries of double standards wondering why no one criticized attacks and massacres in Afghanistan, Pakistan and Fallujah."
This comes at a time when the US should be trumpeting another homegrown breakthrough in technology that led to a significant mile stone. The Financial Times reports today that US oil output hit the highest level since 2002 because of an increase in the use of "unconventional" extraction techniques. The FT says that, "According to the US government's Energy Information Administration, domestic production of crude oil and related liquids rose 3 per cent last year to an average of 7.51m barrels a day — its highest level since 2002. The rise enabled a 2 per cent drop in US oil imports to 9.45m b/d, in spite of rising demand as the economy recovered. US oil imports have fallen steadily since 2006. The revival of US production has been made possible by a rush of small and mid-sized companies into onshore regions such as the Bakken shale in North Dakota, the Permian Basin in west Texas and the Eagle Ford shale in south Texas. North Dakota's production has doubled since 2008, reaching 355,000 b/d in November. Extraction of oil reserves in these regions was thought to be uneconomic, but has been made commercially viable by the transfer of techniques successfully used to extract shale gas; in particular, long horizontal wells and fracking, pumping water under high pressure to crack the rock and enable the oil to flow."
A must read in the FT! It is amazing that it did not take one dime of taxpayer's money to come up with this revolutionary idea to produce more oil. Imagine that!
The other issue is oil's impact on inflation. Rising global inflation is a reason that the dollar has remained weak and the market knows that Ben Bernanke and the US will be the last Central Bank in the world to move to fight inflation. On the other hand, Jean Claude Trichet cannot sleep as dreams of runaway inflation dance in his head.
Reuters News reports, "The European Central Bank will step up its anti-inflation rhetoric and may phase out some of its crisis support measures on Thursday as it prepares the ground for an interest rate rise likely later this year. ECB President Jean-Claude Trichet will also present upward revisions to the central bank's inflation and growth forecasts after a monthly meeting of its policymakers, several of whom have recently expressed concern about firming price pressures. The ECB, which has begun meeting in Frankfurt, will have to heed accelerating inflation but its readiness to restart its 'exit strategy' may be limited by doubts about whether EU leaders will agree later this month to bolster Europe's rescue fund."
Libya is the hot spot and contagion is the word for the day. The risks of the unrest spreading continues to grow.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at email@example.com.