Oil Price Soar

As the future of Libya hangs in the balance, the faith of the countries oil fields is a major concern worldwide. Dictator Gadhafi may be ordering sabotage attacks on oil pipelines leading to the Mediterranean Sea. Libya is the latest nation to be rocked by protests by the ouster of Tunisia's president last month. Gadhafi's refusement in stepping down from his 41 year ruling has caused the recent up rise against him. Libya having the largest oil reserves in Africa, the ninth-largest producer among the OPEC members, pumping 1.6 million barrels a day of oil, is a huge cause for concern as it has resulted in a dramatic increase in crude oil prices.

Oil prices are now the highest in nearly 30 months, as the recent revolt in Libya has reduced supplies from Africa's third biggest producer. Brent crude oil prices has rose to an estimated $114 a barrel, and caused Libya to lose up to two-thirds of their oil output, as much as 1 million barrels of Libya's daily oil production. Goldman Sachs estimated disruptions at 500,000 barrels a day. Libya's high quality output of crude oil is being significantly impacted due to the exodus of personnel.

According to the Head of Asian commodities reseach, Soozhana Choi, "The events in Libya and North Africa have brought geopolitical risk back onto the radar,.., how much higher can prices go really depends on the spread of protests in the region.

Worrying is that rising oil prices have a tumbling affect on the the overall consumer price index (CPI) directly by raising its energy cost component. This includes the prices of energy-related items, such as household fuels, motor fuels, gas, and electricity. Among these, gasoline and fuel oil are directly derived from crude oil, so their prices follow oil prices very closely. An increase in the price of oil may also affect energy costs through the prices of other items that are close substitutes; for example, households and businesses may switch from oil-related energy items to natural gas, thus leading to an increase in its price. The extent to which rising oil prices translate into higher overall inflation through higher energy costs depends on their persistence. If they continue to rise, they may lead to sustained increases in the overall price level, that is, to an increase in the overall inflation rate.