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Libya: But What About the Oil?

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
March 25th, 2011

As I pen these few humble words, Swedish combat aircraft are being tuned up for the long flight from Sweden to somewhere in the Mediterranean. There is no shortage of volunteers - pilots, mechanics and other ground crew - for this mission, because it has been a very long winter in Scandinavia, and many young Swedish men are so keen to get close to the disco and bar life in that sunny part of the world that they can almost taste it.

As they used to ask in the U.S. during WW2, is this trip necessary? Well, let's do some math. The price of oil was about eighty-eight dollars a barrel (= $88/b) when the trouble in Libya began, and the price of West Texas Intermediate oil just touched $105/b - which means that the Brent price might be around $115/b. "About, might be, around" is sufficient, because as Bertram Russell once said, "all science is based on approximations". Taking these prices into consideration, my 'back-of-the-envelope' calculations suggest that OPEC - whose exports are at least 25 million barrels of oil a day - has to-date raked in an extra 10 billion dollars or so because of the increased tension in Libya.

But 10 billion dollars might turn out to be no more significant than lunch money for oil importers when all the charges that will have to be faced because of the increase in the price of oil are contemplated. A palpable rise in the price of oil inevitably increases the price of other energy resources, as well as some other items. Furthermore, nobody seems to appreciate the macroeconomic damage that might be done because of the decision by Security Counsel blockheads to 'diss' Colonel Gaddafi, instead of giving him the respect that he obviously feels he deserves. Had I been doing the planning, I would have arranged for him to visit Paris and/or Washington in order to wine and dine and exchange opinions and wheel and deal with the kind of busybodies and careerists who completely lack the ability to estimate the possible economic consequences of the stupid venture they ended up sponsoring or approving.

The venture in question - or fling which it deserves to be called - is about oil, and not about providing for the safety of Libyans. The way to provide for the safety of Libyans was to find some way to talk to the Colonel in a quiet room, and explain to him (and his colleagues) the seriousness and unacceptability of uncivilized and unbusinesslike behavior. If necessary some money could change hands. As the CEO of the Italian corporation ENI pointed out, threatening sanctions and military action might result in the 'peace officers' - to use one of those lovely expressions coined in the old American West for lawmen - shooting themselves in the foot. A decline in world oil production of perhaps 1.5 percent, due to a clumsy handling of the Libyan troubles, almost immediately led to an increase in the oil price of 17 percent. That is not good, and somebody influential needs to look at the work of Professor James Hamilton (of the University of California, San Diego) to see what this can mean for the macroeconomy!

Let's put it this way, the global macroeconomy cannot support the kind of oil price escalation that this fling might bring about. For reasons I choose not to go into here, but which have to do with the strategy of OPEC, that increase could turn out to be a prelude to further increases. With all due respect, instead of running off at the mouth in talk-shops or gab-fests or teach-ins that he hosts, and which could have a very unhealthy effect on the price of oil, Prime Minister Sarkozy should make an effort to avoid commenting on the internal affairs of sovereign states. I know that he doesn't want to busy himself reading about his private life in French newspapers and magazines, but at least he could examine the dossier Les Guerres du Pétrole (in Géoéconomie, 2006), should he feel compelled again to deal with economic issues that neither he nor his up-market friends and neighbors have the slightest possibility of understanding.

REFERENCES

Lindahl, Björn (2011). Oljebolag på två stolar. Svenska Dagbladet (22 March).

Paillard, Christophe-Alexandre (2006). La puissance américaine et l'instabilité energetique mondiale. Géoéconomie (No 38, Ete)



Professor Ferdinand E. Banks
March 25th, 2011
ferdinand.banks@telia.com




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