If Libyan oil goes mainly to Europe, why are U.S. oil prices rising?

Houston Chronicle

Q: If Libyan oil goes mainly to Europe, why are U.S. oil prices rising?


A: The U.S. is dependent on oil imports from overseas, including the Middle East and North Africa. If Libyan oil production is shut off, then European customers normally supplied by that source will seek crude elsewhere, putting them in competition with the U.S. buyers, said Jeff Dietert, co-head of research for Houston-based Simmons & Company International.
The price of oil is always set by the "marginal barrel," the last barrel necessary to meet demand, said Craig Pirrong, a commodities professor at the University of Houston. Because the U.S. is a net importer of oil, the marginal U.S. barrel is an imported barrel that could as easily go to a European or Asian buyer if the price differences justify it.
"So as far as oil is concerned, no continent is an island," Pirrong said.

Q: Are we heading for a repeat of 2008 record oil prices of $150 or more?

A: It depends on whom you ask.
Global demand for oil is stronger now than it was going into 2008 since the global economy is on the mend, putting greater upward pressure on prices, Dietert said. And the current crisis is more like the massive supply disruptions of the 1970s, including the 1979 Iranian revolution, so it could have a more profound and lasting impact.
But analysts with Societe Generale note that there's more spare production capacity today than in 2008.
Members of the Organization of the Petroleum Exporting Countries have about 5 million barrels per day of excess production capacity now, versus less than 2 million in 2008. Crude oil supplies in the U.S., Europe and Japan are also higher now than they were in 2008, and there's more spare refinery capacity.
Jaffe noted that the Saudis are much more inclined to bring that extra production on line today than in 2008.
Tom Kloza, an analyst with the Oil Price Information Service, said he's sticking to his $3.50 to $3.75 per gallon U.S. gasoline prediction. A gallon of regular averaged $3.19 nationwide on Wednesday, and $3.02 in Houston.
"My gut tells me the world can deal with a loss of lots of Libyan oil," he said. "But the real worry is Saudi Arabia. If we wake up and see violence there, I redact all previous predictions."

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