Protracted Oil Spike Possible As Libya Burns

By Win Thin

Hugo Chavez as peacemaker? Color us skeptical. Chavez is hardly an impartial third party in this conflict, as he has cozied up to Qaddafi over the years. As such, we would not expect opposition forces to be very open to any sort of Chavez intervention. Media is reporting that the Libyan government has accepted Venezuela’s offer to mediate, but which government? Given the civil war now under way, Libya no longer speaks with one voice, as underscored by the countless defections by Libyan diplomatic officials and military to the opposition. Rather, it seems some sort of multilateral solution will be needed via the UN or perhaps the Arab League. A no-fly zone over Libya is being contemplated in order to prevent bombing of civilians and opposition forces, but international opinion over this option is divided. China and Russia (members of UN Security Council) have expressed opposition to the no fly zone, as has Turkey (member of NATO).

With military analysts saying neither side has a clear advantage yet in ending hostilities, the risk is that the Libyan conflict stretches for months, rather than days or weeks. Oil spikes typically have little economic impact if the duration is days or weeks. However, a protracted spike would have more serious consequences for the global economy. Asia remains the most vulnerable in Asia to a protracted spike in energy prices, as does Eastern Europe. Many in Latin America have sizable oil reserves and are net oil exporters, including Argentina, Brazil, Colombia, and Mexico to go along with OPEC members Venezuela and Ecuador. As such, high oil prices are a net benefit for many of the major Latin American economies.

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The sorry state of Venezuela’s economy is no secret, and that high oil prices are the only thing going for the country right now. To make things worse, however, years of neglect and mismanagement has seen the country’s oil output steadily decline. Venezuela under Chavez has always tilted towards the hawkish side of OPEC, which typically have smaller oil reserves and large populations and so argue for higher oil prices in order to extract maximum value from a limited resource. This puts Venezuela in the same orbit as Libya and Iran, widely viewed as other OPEC hawks. Doves typically have larger reserves and smaller populations. Because oil is seen as a more long-term resource, these countries favor more moderate oil prices, and include Saudi Arabia, Kuwait, and UAE.

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