A Look at Sanctions on Libya and Their Effect on Oil Supplies

Includes: BNO, USO, WTI
by: Old Trader

The efforts to force Gaddaffi to step down have turned to imposing sanctions on Libya, once again. There are really relatively few options available, after all. Any sort of military intervention would, in all likelihood, merely serve to inflame anti-Western sentiment throughout the MENA region. This despite reports of some opposition forces asking for the imposition of a "no-fly" zone as a way of neutralizing the Libyan air force.

Putting a crimp into Libyan cash flows, whether through financial sanctions, or via an embargo on its oil output, would only impact the current regime. It would have no effect on opposition forces, since they were never the recipients of the oil income to begin with. Any and all funds derived from energy exports went directly to the National Oil Corp., Libya's state-owned oil company.

Of course, Gaddaffi is no stranger to operating under international sanctions. As far back as the early 80's, Libya was slapped with sanctions. First by the U.S., and then by the UN, in a response to its state sponsorship of terrorism. Despite the sanctions, there seems to have been little to no effect on Gaddaffi's hold on the country.

In fact, sanctions seem to have been less than effective in achieving their desired effect, as prior experience with Libya, Iraq, Iran, and Cuba has shown. The negative impact seems to fall most directly upon the populace of the nation in question rather than on the regime in power.

As long as there are entities willing to skirt the sanctions, their effects are blunted. According to the weekend issue of the Financial Times, Chinese and Indian firms have continued buying Libya's oil. Saudi Arabia is said to have ramped up production to help offset the decline in Libyan output (down to 600k/bpd, from 1.6m/bpd, prior to the uprising). Of course, it needs to be noted that the Chinese have already become the Saudi's #1 export customer, supplanting the U.S. Equally important to consider is that the Saudi reserves being ramped up are of a lower quality crude than the Libyan crude that it's supposed to replace.

Finally, arguably the biggest danger is that rather than a relatively quick and bloodless "regime change", events degenerate into a bloody, protracted civil war. Along with extending the period of time that Libya's production is greatly restricted, it would greatly increase the odds that serious, longer term damage is done to either the fields themselves, or as is more likely, to supporting infrastructure such as ports and pipelines.

Looking ahead, to the near to intermediate term at least, I'm of the opinion that oil prices will continue pushing upwards. But they'll do so in a somewhat jagged, volatile manner as the oil market reacts to every rumor and bit of news, either good or bad. For those who say that its the evil speculators to blame and that oil is drastically over-priced, it would take an almost unbelievable flood of good news ("Peace breaks out thorughout the Middle East") to get oil back to even $95/bbl.

Although I'm not especially a fan of ETFs, preferring to "pick" stocks when constructing my porfolio, BNO would be my choice because Brent is more reflective of global oil pricing, rather than say, USO, which strives to capture Cushing's WTI pricing. W&T Offshore (NYSE:WTI) seems to be becoming something of a "stranded asset".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.