Crisis in Libya Raises Fears of Skyrocketing Oil Prices Causing Pain at the Pump

With the crisis in Libya escalating, some oil analysts say Americans should expect to feel it at the gas pump.

Reports are sketchy out of the North African country since Western media is banned from covering the turmoil sparked last week.

Anti-government protestors, encouraged by demonstrations in Egypt that toppled longtime dictator Hosni Mubarak, took to the streets demanding Libyan leader Muammar al-Qaddafi reform the country’s political system or step down. But Al-Qaddafi told the world via state TV Tuesday he will do neither.

Meanwhile, reports continue to trickle out about use of excessive force against demonstrators by government troops and mercenaries. A day laborer told Reuters that fighter jets are bombing crowds in Benghazi and that more than 250 people have been killed in Libya’s capital, Tripoli.

Libya is the world’s 18th largest oil producer at 1.8 million barrels a day, with 1.4 million of that exported. Ninety percent of Libya’s oil comes from the eastern part of the country, a flashpoint for much of the revolt at the moment.

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And although most of Libya’s oil goes to Europe, analysts agree it still affects the price of gas in the United States, especially since Libya is one of the world’s primary sources of the much-sought-after light sweet crude, preferred by refineries.

“Tighter supplies of gasoline anywhere in the world will make the value of high-quality oils greater everywhere,” said Kevin Book, an analyst with ClearView Energy Partners. “Libya going offline could put a much bigger stress on the refined products market.”

Indeed, the unrest in Libya pushed oil prices up 9 percent Tuesday to $93.57 a barrel, the highest since October, 2008.

The latest spike sparked fears that oil could surge closer to 2008 record levels when prices were over $140 a barrel. That kind of increase could slow the US economic recovery.

“For every dollar change in a barrel of oil that works out to be 2.4 cents per gallon of crude oil,” said John Felmy, chief economist at the American Petroleum Institute.

But whether that gets passed onto the consumer is another matter altogether. “Refiners are like bakers, they don’t control the price of bread,” Felmy added.

Average gas prices in the U.S. remained at $3.17 a gallon Tuesday. But that’s up roughly six cents from last week and one analyst says that’s partly a result of the Libya crisis.

Tom Kloza, chief analyst at the Oil Price Information Service, says there’s typically an uptick in gas prices come springtime, largely due to the low demand globally causing sellers to raise prices, but the events in Libya and the rest of the Middle East are not helping keep prices down either.

“It’s a catalyst that has moved up the schedule for what I call ‘petronoia’,” he said. “What surprises me is not that this is happening but that it’s happening in January and February.” He predicts the latest surge will contribute to pushing prices up to $3.50 - 3.75 a gallon by Memorial Day weekend.

And whether that goes any higher will depend largely on whether the current wave of unrest across the Middle East will spread to Saudi Arabia, the world’s number two producer and a major supplier to the United States. “If Saudi Arabia remains stable, then everything calms down in the spring,” he added.

Book agrees, adding a Saudi shutdown would mean lines at the pump pretty quickly. “Maybe a week before demand collapses and physical scarcity begins to rationalize demand,” he said.

During a meeting of oil-producing nations in Riyadh Tuesday, Saudi Arabia responded to those fears and also pushed OPEC nations help cover any disruption in the flow as a result of the Libyan crisis.

“OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, told the New York Times following the meeting. “There is concern and fear, but there is no shortage.”