Don't blame Libya for gas prices

BENGHAZI, Libya —

World fuel prices are surging, in part because of the bloody battle to topple Moammar Gadhafi, but there's one place where the price of a gallon of gasoline has dropped: war-torn Libya.

Rebels in eastern Libya filling up their tanks as they head to battle down the country's coastal highway are paying 25 percent less than they did before their revolution began last month.

Today, gasoline costs the equivalent of 46 U.S. cents a gallon; the price was a little more than 62 cents last week.

Oil company officials in Libya say the drop had nothing to do with traditional rules that drive prices, such as supply and demand: Gadhafi ordered the price cut to curry favor with his unhappy people.

And in that way Libya is like the rest of the world: Oil prices have only a little to do with supply and demand.

The price of a barrel of crude oil has spiraled upward since Jan. 25, when protests first broke out against President Hosni Mubarak in Egypt, a country that produces little oil. Then, a barrel of West Texas intermediate crude was selling for $86.19.

In the weeks since, Mubarak fell, and turmoil hit not just Libya, but Bahrain and Saudi Arabia, two big oil producers whose output dwarfs the 1.5 million barrels a day that Libya produced before the current war. West Texas intermediate peaked for the year at $105.46 a barrel Monday, before falling slightly. Thursday's close was $103.73 on the New York Mercantile Exchange.

Yet, experts say there's no shortage driving that price increase; there are at least 4 million barrels a day of spare oil-production capacity globally, they say.

The soaring price of gasoline offers a similar picture. The price of a gallon of gasoline in the United States is up 41 cents from a month ago, at $3.53 a gallon, AAA reported Thursday.

Yet, U.S. gasoline inventories are exactly what they were a year ago, Ed Yardeni, a veteran financial analyst, said in a note to investors. Crude-oil stocks are where they were two years ago, he added.

Yardeni suggested the biggest driver of the current surge in prices is speculation by people who have little interest in oil except as a way to gamble their money. He said the latest U.S. government report on oil speculation found that large speculators had acquired options to purchase almost 80 percent of the world's entire inventory of oil.

On the face of it, that suggests speculators, not war — or even fear of war — are driving up oil prices.

"The real question is whether there is speculation or excessive speculation. We won't know for months or years whether certain speculators accumulated very large positions" in oil markets, said Mark Cooper, an energy expert for the Consumer Federation of America.

While the consumer-advocacy group was critical of excessive speculation in 2007 and 2008, it's more cautious on today's rising prices because the world is edging closer to tighter supplies.

"It's not a simple answer," Cooper said.

Indeed, it's not. Factoring into prices are all kinds of guesses and worries about what might happen. Oil markets were spooked Thursday by reports that Saudi Arabian security forces had fired on protesters ahead of planned demonstrations Friday. Saudi Arabia is the world's largest oil exporter and widely considered the producer of last resort, willing to pump out extra oil when supplies are stressed.

Unrest there could seriously disrupt supply, and worry about that was enough to keep oil prices up, even as other economic news — a possible recession in Europe, weaker-than-expected economic data out of China — drove the Dow Jones industrial average down more than 228 points, to close below 12,000 for the first time in weeks.

The situation in Libya compounds the unease, even though Libya is a relatively small oil producer whose supply goes primarily to Italy, France and Spain — perhaps a factor in France's recognition Thursday of the rebels' National Libya Council in Benghazi as the only legitimate Libyan government, even though pro-Gadhafi forces seem to have the momentum, forcing rebels from the oil refinery town of Ras Lanouf and apparently assuming control in the oil terminal city of Zawiya, 30 miles west of Tripoli, the capital.

"There's now been some significant attacks in and around the key oil installations [in Libya], and the market is working to assess, and that is keeping prices higher than they otherwise would be," said John Kilduff, a veteran oil analyst for AgainCapital in New York.

None of those factors, however, makes much difference to gasoline prices inside Libya, where Gadhafi remains firmly in control of the price of gasoline, even in the east, where the rebels largely are in charge.

That's how the price dropped from what had been 20 Libyan cents a liter to the current 15 Libyan cents — a move oil officials in the east agree Gadhafi ordered in hopes it would raise support among Libyans.

In addition to cheaper gas, Gadhafi also doled out 300 dinars — about $245 — to each family and had the phone company add 100 dinars — $82 — worth of credit to every cellphone in the country.

Such generosity would be impossible if not for oil revenues, which traditionally have flowed to the Tripoli-based Libyan National Oil Corp., which controls the distribution and price of gasoline for Libya's 6 million residents.

Gadhafi moved to lower the price after rebels seized control of the oil-refinery town of Brega, where the refinery converts oil to refined products at a rate of 10,000 barrels a day.

The opposition National Libyan Council announced three days later that it was now in control of the liberated east and its oil, and that it was taking steps to make sure oil money stayed in the east. The council called on oil companies and distributors there to no longer pay the National Oil Corp. Instead, the council said the money should go to the Arab Gulf Oil Co., an affiliate of the Libyan government's company that's set up a new account through a Benghazi bank to accept payments.

"You think we are going to let them kill us with our money?" asked company executive Abdelsalem Jaffer, referring to the use of oil profits to buy weapons to arm Gadhafi's forces.

Some members have suggested oil revenues could pay for local government salaries that once came from Tripoli, as well as pay for other local government services. These members said the east has only enough cash reserves for another month.

The potential oil revenue will grow over time, they say. Libya now produces a fraction of what it used to. Jaffer, for example, said his company is only producing 130,000 barrels a day nationwide, compared with 420,000 barrels before the fighting began.

That eastern Libya could control its oil revenue has left people here dreaming of modernizing the region.

They also hope it will spur the United States to push more aggressively for a no-fly zone and other assistance that might help the rebels fight pro-Gadhafi forces.

"Sooner or later," Jaffer said, "the United States will see we have oil and that we want to sell. We don't want to keep it. We want to be like Dubai."