Global energy markets are facing the lengthy shutdown of Libya's oil exports as international companies retreat under the weight of sanctions and political chaos.
The violence in Libya comes amid escalating concerns about the political turmoil spreading to the oil-rich Persian Gulf region.
Crude prices climbed further Monday as forces loyal to PresidentMoammar Gadhafi attacked rebel positions at the Ras Lanouf oil port, and companies such as Morgan Stanley, Exxon Mobil Corp. and ConocoPhillips Co. have halted trading with the country.
As much as two-thirds of Libya's 1.6-million-barrel-a-day capacity had already been shut down, and analysts said it will be difficult to maintain any export capacity as political and security conditions deteriorate.
"You have an uncertain physical capacity because even you if can export 750,000 barrels today, the situation remains so chaotic that you're not really sure what you're going to get tomorrow," said David Kirsch, an analyst with PFC Energy, a Washington-based political risk firm.
But even if the export capacity remains, Libya's trading partners face troublesome issues over sanctions, and the murky legal status of former divisions of the national oil company that are now operating as independent companies.
"You now have an issue of uncertain title to the oil and you will have companies facing legal uncertainties unwilling to go into that market," Mr. Kirsch said. "It's a very difficult situation and a lot of the regular buyers are going to stay away from it."
While Libya is responsible for less than 2 per cent of the world's oil, its impact on global markets is heightened by the high quality of its light, sweet crude, which is mainly exported to Europe, whose refineries aren't equipped to deal with higher-sulphur crude oils.
On the New York Mercantile Exchange, the benchmark West Texas intermediate rose $1.02 to $105.44 (U.S.) a barrel on Monday, after trading close to $107 earlier in the day. The international benchmark crude, North Sea Brent, climbed 32 cents to $116.29.
The risk premium embedded in the global oil price goes well beyond the situation in Libya. In fact, Saudi Arabia has vowed to cover any shortfall created by the Libyan crisis, and the world has large inventories of crude in storage that refiners can draw on.
The real fear is contagion – the spread of political unrest to oil-rich countries of the Middle East, and perhaps Saudi Arabia itself.
For now, North American companies are bailing out of Libya, following the imposition of sanctions by the United Nations and the national governments.
Exxon is "complying with UN and U.S. sanctions against trading with the government of Libya," company spokesman Kevin Allexon said. He rejected suggestions the company could be trading with rebel-held operations, saying the sanctions covered the entire country.
Calgary-based Suncor Corp., which has significant operations in Libya, said all work on company-operated fields has been suspended, staff have been evacuated, and that it is complying with sanctions and no longer trading with the Libyan government. Suncor says it does not have "reliable information" on fields in which it is a minority partner and that are operated by the Libyan national oil company.
Some trading companies are expected to continue to load tankers from Benghazi and other open ports. Companies like Glencore International AG and U.K.-based Trafigura – which trades some 2.5 million barrels of oil a day – are more likely to accept the higher risks of doing business in Libya.
But the prospect of a lengthy civil war could keep the vast majority of Libya's capacity shut down for a protracted period.
"Even if Gadhafi left, there is a going to be a huge political vacuum there that could make returning to Libya difficult," said Helima Croft, a senior geopolitical analyst with Barclays PLC in New York. "But in the case where you have a civil war, you could discount those barrels for a considerable period of time."
Beyond Libya, Bahrain is one potential flash point. The Shiite majority there continues to agitate for democratic rule and for the resignation of the Prime Minister, a member of the Sunni royal family who has close ties to the Saudis.
And Bahrain is adjacent to the eastern province of Saudi Arabia, which has the same demographics and the political tensions, with demonstrations planned for later this week. Like most analysts, Ms. Croft believes the Saudis have a firm grip on power in the oil-rich eastern province, but she is not prepared to rule out trouble.
"If you had said in January when the protests started in Tunisia that we would see [former Egyptian president] Hosni Mubarak gone from power, that we would see Libya on the verge of civil war, many people would have discounted that," she said.
"And the concern still, is whether something is going to happen in Saudi Arabia. That is the fear that is lurking behind all of the headlines about the region and oil prices."