End of Libyan War Could Mean Lower Gas Prices

Stability in Libya could mean the return of million of barrels to global oil supply.

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U.S. consumers could soon feel the impact of a potential resolution to Libya's civil war, in the form of lower gas prices. [Check out political cartoons about gas prices.]

The turmoil in Libya greatly disrupted that country's substantial oil production and exports. Before the country's civil war erupted in February, Libya produced 1.6 million barrels of oil per day and exported 2 percent of global oil supplies. The conflict curtailed that supply by more than 90 percent. But with rebel forces apparently on their way to seizing control of Tripoli, the civil war appears to be in its final throes.

Italian Foreign Minister Franco Frattini told his country's state television that oil company Eni has returned to Libya and is considering restarting production. Eni said in July that upon resolution of the Libyan conflict, it could be a year before the company again reaches full production capacity in that country. [Check out our Energy Intelligence blog.]

The developments do not appear to have greatly affected oil prices in the United States, with crude futures on the New York Mercantile Exchange up slightly. However, Brent crude, which is used to price oil in many international markets, is down. [Read: Why Gas Prices Rise Faster Than They Fall.]

A quick and stable resolution to the Libyan conflict could mean significant reductions in oil prices. "Certainly it's our view, and I know it's the view of some oil analysts that we talk to and respect, that curtailment of Libyan oil supplies is partly responsible for recent high levels of oil prices," says Joel Prakken, chairman of St. Louis-based economic consulting firm Macroeconomic Advisers.

That could mean a boost to the U.S. economy in the form of new consumer spending. According to the American Automobile Association, gasoline is currently more than 85 cents per gallon more expensive than it was one year ago. For a person buying 10 gallons of gasoline per week, that is more than $440 extra spent on gasoline over the course of a year. A decrease in prices could significantly free up money for other parts of the U.S. economy. [See editorial cartoons about the economy.]

Whatever decreases the U.S. sees in gas prices, however, would likely mean only a minor improvement in U.S. economic fortunes. "It could be a positive development, but I think it would not be an overriding positive development," Prakken says. "It would definitely be beneficial, but I wouldn't go out and radically change my near-term U.S. outlook based on that," he adds.