Oil prices should fall with Gadhafi overthrow

[August 22, 2011]  NEW YORK (AP) -- Oil prices around the world should start falling if Libyan rebels succeed in toppling Moammar Gadhafi's regime, though the full effect won't be felt for months.

On Sunday night, rebel forces pushed into Tripoli without meeting much resistance, hours after they overran a major military base that defended the capital. Opposition fighters captured Gadhafi's son and one-time heir apparent, Seif al-Islam.

Independent analyst Andrew Lipow said oil markets will likely respond Monday by sending prices lower in "a sign of relief that conflict has come to the end." But Lipow said it will take time for the market to erase the hefty price increase that resulted from the suspension of Libyan oil exports since the rebellion began in February.

Brent crude for October delivery was down $3.22 per barrel to $105.40 on London's ICE Futures exchange. Benchmark oil for September delivery was down 25 cents to $82.01 a barrel in electronic trading on the New York Mercantile Exchange. Crude fell 12 cents to settle at $82.26 on Friday.

When fighting broke out, oil was trading at around $84 a barrel. It quickly spiked above $93 and kept rising to a high above $110 at the end of April. Demand from emerging markets including China was also a factor in the rise. Oil has fallen recently along with stocks because of concerns about the global economy.

Libya used to export about 1.5 million barrels of oil per day, almost all of which have been cut off. Although Libyan oil amounted to less than 2 percent of world demand, its loss affected prices because of its high quality and suitability for European refineries.

The European refineries have struggled to make up for the production loss despite an increase from Saudi Arabia. As a result, European markets should see the first and most significant drops in oil prices, Lipow said.

He added that any developments in the ongoing European financial crisis could also move stock markets around the world this week and oil prices along with them.

Independent analyst Jim Ritterbusch said that even if rebels manage to push Gadhafi out soon, the near-term effects on oil prices will be limited.

"Psychologically anyway, it's going to force some additional selling," Ritterbusch said. "But selling may not be pronounced because there's still a lot of question marks remaining" on how long it would take for production to resume.

Michael Lynch, president of Strategic Energy & Economic Research, said that once Gadhafi is pushed out, Libya's new government could take the path of the Iraqis after the fall of Saddam Hussein and spend years fighting over every detail. Or it could follow Kuwait's example and quickly decide to bring in an outside company to get production restarted right away

He added that there's always a chance that the process could come to a halt if one of the rebel generals tries to seize power, or if different factions get caught up debating the country's new constitution and put off making decisions about oil production.

"They do have a good cadre of educated people, but they don't have a long record of competent self-government," Lynch said. "It would not be a bad bet to think there might be a chaotic period for a few months till they get organized."

[Associated Press; By BREE FOWLER]

AP Energy Writer Chris Kahn contributed to this report.

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