Back in February, Saudi Arabia's oil minister declared that OPEC oil priced between $70 and $80 a barrel would be fair for producers and consumers. But that was before the Arab Spring, which added an estimated $15 to oil prices. Will we ever see oil prices below $90 again?
How exactly did this happen?
Political unrest and war in Libya forced oil companies Total SA (NYSE: TOT ) and Eni (NYSE: E ) , and Suncor's (NYSE: SU ) Petro-Canada subsidiary, to stop producing oil. To make up for the shortage, OPEC agreed to let Saudi Arabia ramp up production 22% higher than its normal quota. As a result, the country produced more oil in August than it had since 1980.
When Eni restarted Libyan production last month, the price of oil fell to less than $100 for the first time since February. As production levels in North Africa continue to improve, OPEC countries that increased production, like Saudi Arabia, will decrease production accordingly. Saudi Arabia cut production by 1.3% in September.
Libyan oil production
Libya has the largest oil reserves in Africa. Before the strife, the country produced 1.6 million barrels of oil per day, good for 2% of the world's total. Last year, escalating tension slowed output to 1.3 million barrels per day, declining steadily until all producers had to stop completely.
Now that Eni, Total, and Petro-Canada are bringing their operations back online, along with Libya's National Oil Corporation, production is on schedule to reach 500,000 barrels per day by the end of this month, but it is not expected to reach pre-war levels until 2013.
Estimated Return to Full Production
|Petro-Canada||100,000||End of 2011|
Total does all of its Libyan drilling offshore, so its site wasn't physically affected by the war in Libya. Eni, however, does the bulk of its work onshore and must contend with looted oil worker camps, significant damage to infrastructure, and a shortage of foreign oil workers.
Will oil ever drop below $90 again?
Don't expect to see the $70 to $80 "fair" price of oil any time soon. Many OPEC countries, including Saudi Arabia, are responding to the unrest across the region by throwing money at the problem. The countries will collectively spend about $150 billion in an effort to mollify social unrest in the region, and though OPEC raked in a record $1 trillion this year, oil prices below $90 frankly just won't cut it.
OPEC meets in December to determine how much of its oil the world will need next year. Analysts expect production cuts will be based on keeping the price of oil above $90 to fund the increased social spending.
The next year will be an interesting one for energy. What will play out in the Middle East? Will the Keystone XL pipeline win approval? How drastically will oil prices be affected? In the meantime, it's worth checking out the free report our Rising Star analysts put together discussing three stocks to benefit from $100 oil.