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Oil soars to more than $100 on Libyan unrest

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March 2 (Bloomberg) -- Amrita Sen, a commodities analyst at Barclays Capital, talks about the outlook for oil production in the Middle East amid social unrest in Iran and Saudi Arabia. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."

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Washington Post Staff Writer
Wednesday, March 2, 2011; 10:50 PM

Crude oil prices climbed to a 29-month high in New York on Wednesday, settling at more than $100 for the first time since September 2008 as fighting near key oil ports in Libya fueled anxiety that instability there could be prolonged and might inspire unrest in another oil-exporting nation.

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Although oil experts said there is enough oil in storage and spare capacity worldwide to meet short-term needs, the price of crude oil for April delivery on the New York Mercantile Exchange hit $102.23 a barrel, up $2.60.

"The conventional wisdom a week ago was that [Moammar] Gaddafi would go in a week," said Helima L. Croft, an oil and Africa analyst at Barclays Capital. Tunisian and Egyptian leaders stepped aside quickly in the face of protests.

"But now," Croft said, "Gaddafi is digging in and is holed up in Tripoli with African mercenaries. . . . So there could be a significant outage for a significant period of time."

In the United States, oil market reactions to the Libyan upheaval continued to drive gasoline prices higher for consumers. Pump prices have reached $3.39 a gallon, up about 20 cents in the past week and 30 cents in the past month.

Many investors are worried about upheaval spreading to other oil exporters. In Algeria, the government has taken steps to protect its oil and gas infrastructure. On Wednesday, protesters blocked a road in Oman, two protesters were shot and killed in Yemen, and Web sites in Saudi Arabia called for national "day of rage" protests this month. In April, oil-rich Nigeria will hold presidential elections, often an occasion for sectarian and regional strife.

"What our clients are interested in is this Libya plus one scenario," said Greg Priddy, an oil analyst with Eurasia Group. "My phone is ringing off the hook with people asking whether Algeria, Oman and Saudi Arabia and Iran could be next." Priddy said that he wasn't alarmed but that "headlines [about other countries] are having an outsized impact."

Economists and oil experts are worried that rising gas prices could hurt the U.S. recovery.

"Gasoline above $4 a gallon really does have a negative impact on the economy," said Robin West, head of PFC Energy, a Washington consulting firm on energy issues.

Federal Reserve Chairman Ben S. Bernanke, in congressional testimony Wednesday, said that the higher price of oil "is primarily due to global supply and demand." He told the House Financial Services Committee that the increase in demand is coming from outside the United States.

"So there's a limited amount of what the Fed can do about oil prices alone," he said. "Again, though, we want to be very sure that it doesn't feed into overall inflation. We will make sure that doesn't happen."

Senate Energy and NaturalResources Committee Chairman Jeff Bingaman (D-N.M.) said that President Obama should "be ready to consider a release of oil from our Strategic Petroleum Reserve if the situation in Libya deteriorates further" or in the event of "turmoil spreading from Libya to Algeria, or from Bahrain to Saudi Arabia."

Financial issues could be as big an obstacle as physical danger in getting oil out of Libya. Priddy said that some hedge funds would like to buy oil from Libya, but in light of the uncertain outcome of the fighting, banks are reluctant to issue new letters of credit, which are needed for buyers and sellers to close deals.

"The seller doesn't have clear title," Priddy said. He noted that rebel forces control the eastern part of Libya, where most of the oil fields and ports lie, while Gaddafi retains control of the capital and fields in western Libya as well as the national oil company.

That confusion might continue "if a protracted standoff drags on for months rather than weeks," Priddy said. He said that Libya's oil exports, down to a third or less of previous levels, "could fall off to close to zero absent a legal framework."

Some rebel leaders have said they would honor oil deals in the interest of the people, while rejecting others. Reuters reported that a judge serving on an interim governing council in Benghazi said, "If the deals are good, we will support them. If not, we have the right to negotiate and translate the will of the people in the street, who want democracy and are asking: 'Where is our money?' "

"It is a little bit in limbo," said one European trading official, whose firm recently picked up a small amount of Libyan refined petroleum products. Last weekend a Chinese trading company, Unipec, managed to buy a tanker of oil, according to oil traders who asked for anonymity to protect their business contacts, but it was not clear how it paid for the shipment.

Croft said that markets could soon see "conflict oil" in theway that "conflict diamonds" emerged from war-torn countries in West Africa a dozen years ago.

Although insurance rates are high, the Libyan state oil company is offering discounts to compensate international companies.

Producing the oil and loading it at port terminals could also be a problem. International oil companies have evacuated nearly all of their foreign workers, and Libyans could be staying away from work because of fear of violence.

Even if Gaddafi falls from power, Libya could be torn by rival forces.

"Even when Gaddafi goes, you have a country that doesn't have a parliament, doesn't have a constitution, has no real government agencies. You're going to have a huge power vacuum when he goes. Libya is not going to look like Egypt. Egypt looks so orderly by comparison."


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