Libyan Oil: Supply, Demand and Speculation

I'm no economist, so let us get that out there in the beginning of this article. I took an intro to econ in college and got a solid average B+, so anything I say here should be taken with a grain or two of salt. That being said, I feel that I am pretty in tune with what is going on in the world. Which is why I was very surprised that the New York Times would print an article entitled, "Tremors From Libya Threaten to Rattle the Oil World" in their "News Analysis" section and leave out the very word that sums up the entire "oil world" as we know it today: speculation.

They lay out the facts of reality today, but in very soft terms. They mention that Libya is a small oil producer and that Saudi Arabia has agreed to increase production to fill the "void" left by Libya. To be more precise, Libya produces only 2% of the world's oil and, to reiterate, Saudi Arabia is more than willing and able to make up all of that. In other words, in the world of supply and demand, nothing changes. In fact, this news has allowed oil prices to drop during Monday trading.

So why the big stink about Libya? The higher the price of oil, the higher the profits of oil companies like Exxon Mobile, whose profit rose 53% in the fourth quarter of 2010. Additionally, the more Wall Street whines about oil supplies (that in reality are unchanged) the more things become a self-fulfilling prophecy. Take this paragraph from the Times article:

The price of oil had been rising steadily even before the wave of pro-democracy protests swept much of the Middle East and North Africa. A recovering global economy had convinced traders that demand for oil was going to rise by about 2 percent in 2011. Some industry experts and Wall Street seers were predicting a gradual march back to $120 and even $150. The thinking was that investors would pour money into the commodity markets.

So Wall Street had predicted–even before the North African pro-democracy revolutions–that the demand for oil would rise, which would lead to a rise in oil prices. But the main driver of the rise in oil prices? People "pouring money into the commodity markets." In other words, speculation. So a rise in prices thanks to higher demand (assuming OPEC did not increase production to meet this demand) would be exacerbated by people betting on oil futures. A psuedo-supply problem simply acts as a catalyst for this, allowing Wall Street can meet their predictions while everyone else pays nearly $4.00 a gallon.

So, as far as "new analysis" goes, this is pretty soft. There are some serious statements that are clear in the article, the best of which is, "But the events unfolding in the Arab world, the epicenter of global oil production, are a sobering reminder that trading in oil, that mother of all commodities, is at heart a political game." But too much credence is given to Libya's position as an oil producer which is really negligible in all of this. The main focus here ought to be speculation, but it is not. It is what Wall Street thinks about oil prices and where they are headed. If Wall Street says oil prices will rise enough times, they will rise, regardless of supply and demand. There is your "analysis."

The flag that Libyan protesters have adopted (Al Jazeera)