Libya produces a sizeable chunk of the world's oil, and is Europe's third largest supplier. Oil prices jumped on Tuesday in response to the violence, and pressure is mounting on OPEC to free up more supplies.
The key oil benchmark prices in Europe and the US jumped to two-and-a-half-year highs on Tuesday, as the markets respond shakily to the escalating violence in Libya.
Brent Crude from the North Sea briefly hit $108.57 (79.44 euros) in morning trade, before dropping during the course of the day. Meanwhile, West Texas Intermediate's prices for future deliveries in April soared by almost seven dollars to $94.49 at one point in Tuesday trading. Most prices for imported oil on the European and US markets are based on these so-called benchmark indicators.
"It's like one of those Australian bushfires - once it takes hold, it's very difficult to put out," Michael Hewson, an analyst for CMC Markets said. "Until the situation in the Middle East settles down, you are going to have very wild price swings."
Libya is a major African oil producer and a member of the Organization of Petroleum Exporting Countries (OPEC), exporting most of its oil to European countries like Italy, Germany, Spain and France.
German company Wintershall has reduced production in Libya and evacuated some staff
"I think [OPEC] should get involved soon, because we need some signals for the market," energy analyst for the German Institute for Economic Research, Claudia Kemfert, told Deutsche Welle. "Right now, if Libya was to stop oil production, we would lose 2 percent of the global oil supply."
Kemfert said that, while this figure may not be particularly high, OPEC would be well advised to increase production capacities in other member states, so as to calm the market's concerns over further unrest in the region hitting oil supplies elsewhere.
OPEC: we're watching, and we're ready
OPEC representative and United Arab Emirates energy minister Mohammad bin Dhaen al-Hamli said on Tuesday that the market was reacting to the violence in the Middle East, not to fundamentals, saying there was no need to free up extra oil supplies at present, despite the unrest in Libya.
The countries in OPEC "are watching the situation and [are] ready to act when necessary," Hamli said, adding that he was concerned about the Libyan situation in particular "because it is a member of OPEC and a major oil producer." The UAE minister made no reference to the moment when OPEC might deem it necessary to intervene.
OPEC says oil prices should stabilize without increasing supplies
The US Deputy Secretary of Energy, Daniel Poneman, who was attending the same producer-consumer meeting in Saudia Arabia as Hamli on Tuesday, also called for action from OPEC.
"All oil producers need to respond," Poneman said. "Expect all of them to respond." And he added that rising crude prices could jeopardize economic recovery.
OPEC's spare capacity of up to 6 million barrels of oil easily covers Libya's daily production of roughly 1.6 million barrels, and most analysts are attributing the surge in market prices to concerns that the unrest might spread to bigger oil-producers in the region like Algeria, Kuwait and the United Arab Emirates.
German oil supply safe, but trade with Libya in jeopardy
Oil accounts for almost 99 percent of Libyan exports to Germany; the wheat, olives, tomatoes, salt and chalk that the country also sells are of little interest to the German market. Libya is one of the top five oil importers, but its contribution is dwarfed by the German market's two main sources, Russia and the North Sea.
"There is no direct danger to the German oil supply because of the political unrest in the Middle East and North Africa," a spokeswoman for the Association of the German Petroleum Industry said on Tuesday.
Oil and natural gas supplies to Italy, Libya's largest customer, have been hit hard
Nevertheless, oil companies working in Libya are concerned about their short-term future there. European oil and gas firms like Shell, ENI, and German group Wintershall (an offshoot of the BASF chemical giant) started evacuating staff and scaling down production as a precautionary measure.
German imports to Libya, though of lesser value than the oil brought in, have been increasing in recent years, thanks to several major state contracts. Machine tools, often connected to the oil industry, accounted for much of the surge in trade between 2008 and 2009, when import figures doubled.
Gadhafi's tight control over Libyan affairs helps explain such statistical anomalies, according to Friedrich Wagner, the Africa representative for the German Engineering Federation (VDMA).
"Obviously, our trade with Libya is heavily dependent on state contracts. The Libyan economy is a government-run economy, and it's dependent on investment decisions made by the government," Wagner said.
If the current unrest in Libya persists, such trade could soon come to a halt, at least temporarily. German Foreign Minister Guido Westerwelle on Tuesday raised the specter of sanctions against Moammar Gadhafi's regime if it continued to violently suppress opposition protests, saying financial penalties would be "unavoidable" unless the government in Tripoli changed its ways.
Author: Mark Hallam (AFP, dpa, Reuters)
Editor: Michael Lawton