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During a guided government tour for journalists, Libyan government soldiers celebrate at the west gate of town Ajdabiyah. Libya's army pounded an opposition-held city in the country's west and battled fighters trying to block its advance on a rebel bastion in the east on Wednesday amid flagging diplomatic efforts to end the bloodshed.


Libya may soon cease to be a player in the oil markets, and that's bad news for anyone who fears that rising oil prices will stall the global oil markets.

Two factors are at play in Libya. The first is the United Nations' vote to authorize "all necessary measures" to protect Libyan civilians as Moammar Gadhafi ramps up his war against the rebels. That not only means a non-fly zone (complete with six CF-18 fighter-bombers from the Canadian air force, by the way), but also, presumably, air strikes on Col. Gadhafi's ground forces and military installations. In other words, the civil war could morph into international war very quickly, and that would not be good for Libya's oil infrastructure.

The second factor is Col. Ghadafi's rage against Western oil companies. A couple of weeks ago, the Libyan strongman, in power since the late 1960s, vowed to boot out Western oil companies, which include Italy's Eni, the biggest foreign oil investor in the Libya, Suncor (through its Petro-Canada division) and Repsol, the Spanish oil giant. His idea is to replace them with Chinese, Indian and possibly Russian oil companies, which, historically, are much more tolerant of political risk and have few qualms of breaking bread with dictators.

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Assuming Col. Gadhafi stays in power -- that's a big if, with NATO war ships thrashing their way through the waters between southern Europe and Libya -- the switchover is bound to be messy and damaging to oil production. If Col Gadhafi loses, he might very well torch his country's oil facilities in retaliation for the hail of smart bombs with his postal code programmed into their software.

Wars, civil or otherwise, are not food for oil production. Take Iraq. Its production peaked at about 3-million barrels a day in the late 1980s. The first Gulf war sent output below 300,000 barrels a day. It recovered somewhat, then plummeted again after the second Gulf war. Today, it is climbing again, though remains well below its peak.

Libya is no oil giant, but in a world of tight oil supplies, removing even a small amount of production can have an outsized effect on prices. In London Friday morning, Brent crude reached $116 (U.S.) a barrel, up some $9 in two days, in spite of concerns that the Japanese earthquake catastrophe could plunge Japan, the world's third biggest economy, into recession.

Libya is the world's 17th largest oil producer and third largest in Africa. The country normally pumps about 1.6-million barrels a day -- equivalent to 2 per cent of global consumption -- the vast majority of which is exported to Europe. Two-thirds of that output has already vanished as pro- and anti-Gadhafi forces slug it out on the ground. Libya, however, is more important than its production figures suggest. That's because its oil reserves are thought to be the largest in Africa. In other words, it has the potential to boost production. With the Libyan war about to intensify, any notion of production increase in the short- to medium-term is sheer fantasy.

Saudi Arabia and its OPEC friends have promised to replace any lost Libyan production from their own fields. There are serious doubts whether OPEC has the potential to do so. While lost Libyan output appears to be priced into the oil markets, the days of $100-plus oil may be here to stay.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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