Oil prices rose again on Monday, as unrest in Oman compounded worries over the crisis in Libya. This seems a simple story. Regimes in major oil producing countries are crumbling, disrupting production. Speculation then pushes prices up until the Saudis step in to cover lost production, and the status quo ante is restored. This simplicity, however, is deceptive.
The current price spike is a blip brought about by short-term market reaction; normal service will be resumed quickly. But a series of much more important underlying trends are making the global oil market more vulnerable, and carry with them significant threats to a fragile global economic recovery. In particular, beyond the drama on the streets of Libya, the world is increasingly reliant on oil supplies from countries that are authoritarian, or worse.
The contours of the oil market are well known. Rising demand, led by the rapidly emerging economies of east Asia, is happening in step with declining production in the North Sea and Alaska, as old fields mature. As a result oil is increasingly traded, as the US, Europe, Japan, China and now India rely on imports to meet their needs. Twenty years ago, two-thirds of world oil was produced in the country in which it was consumed. Now half – more than 40 million barrels a day – is traded internationally. That proportion is increasing all the time.