The Oil Market's Overreaction to Events in Libya

02/22/2011 08:47 am ET | Updated May 25, 2011

The price of oil has jumped to the highest level in the past two years in reaction to concerns over the events in Libya. The concerns about Libya are real and there is no assurance that the flow of oil from that source will not be disrupted.

Yet in the greater scheme of things what would that mean? Libya produces some 1.7 million barrels per day (bpd). That is far less than the idle capacity of Saudi Arabia alone and it is but a tiny fraction of the 4.1 billion barrels of oil of public and industry strategic reserves held by the International Energy Agency and its member countries.The United State's Strategic Petroleum reserve alone holds near 750 million barrels of oil.

Today, in a welcome example of supplier responsibility, Saudi Arabia, through the comments of the Saudi Deputy Oil Minister Prince Abdulaziz bin Salam, made it known that Saudi Arabia will not allow any supply disruptions from the Middle East to impact oil supply. Saudi Arabia's spare unused capacity exceeds more than 4 million bpd, more than twice Libya's 1.7 millions bpd output.

World supplies are ample and well positioned to handle the additional steaming time from Saudi Arabia even should matters escalate in the Middle East, making passage through the Suez Canal problematical. The additional cost of the longer supply line would be minimal, in the cents per barrel, as compared to the near $7.00 per barrel increase being registered in today's oil market trading (please see "Risk to the Suez Canal Sets The Stage For Falsely Hyping The Price of Oil" 02.02.11).

Commentators today are repeatedly referring to the level of oil reserves held by the Libyan oil fields, projecting concerns that these reserves are in danger of being cut off from the world market. That concern is spurious to say the least. Irrespective whatever the outcome of events in Libya, it will be in the interest of this regime or successor regimes to tap those reserves as quickly as they can. Temporary interruptions are certainly a possibility; long term stoppage, hardly.