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EU oil embargo could destabilise Libya

Energy Global,

According to Business Monitor International (BMI), the EU is considering the use of an oil embargo as a potential means to press for a solution to the ingoing conflict in Libya. The embargo is one of a range of options under review, and is considered to be among the more extreme.

From the EU’s perspective, an embargo would be manageable under current market conditions. At the time of writing, front month Brent was trading at US$48.6/bbl, having lost approximately 60% of its value since June 2014. The sharp fall in crude prices has been driven by a mounting supply glut, most visible in the heavy build up of light sweet crudes in the Atlantic market.

In current market conditions EU importers are more able to shift away from Libyan crude, and at a lower cost. The shift would also be less disruptive at this point, as a high level of volatility in Libya’s production over the past two years has driven greater diversification in supply.

In the first two weeks of January, BMI estimates that Libyan output has averaged below 250 000 bpd, barely sufficient to meet domestic consumption, and leaving limited crude available for export. As such, an embargo would have little tangible impact at this point.

However, given Libya’s volatile output, revenues in 2014 depended heavily on the country’s ability to rapidly ramp up its production in the wake of major supply outages. An oil embargo would severely inhibit the prospects for this type of quick fire recovery. As both parties to the conflict are in receipt of oil revenues, the threat of embargo could bring substantial pressure to bear.

The threat of sanctions may offer a useful tool to EU mediators to the conflict, but BMI believes that an oil embargo would be put in place only as a last resort. The Libyan economy is heavily dependent on oil revenues, and the impact of the embargo could be crippling. Any further collapse in the state would cause damage to the civilian population and ripple effects on the conflict are impossible to predict. In BMI’s view, more targeted sanctions may first be used, in an attempt to bring both parties back to the table.

Adapted from a report by Emma McAleavey.

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