The year 2011 was eventful for oil markets, as reflected both in price trends and developments that may presage broader structural shifts over the coming years.
The spot price of North Sea Brent crude averaged over $111 per barrel in 2011, marking the first time the global benchmark averaged more than $100 per barrel for a year. U.S. benchmark West Texas Intermediate (WTI), plagued by transportation bottlenecks, fell short of eclipsing its record annual average of $99.67 per barrel set in 2008, but its 2011 average of $94.86 still represented a $15 increase over 2010. Bookended by the departure of Tunisian President Zine El Abidine Ben Ali in January and by the withdrawal of U.S. troops from Iraq in December, the year saw many developments in countries seen as critical for global oil supply. Yet, however dramatic the short-term oil market impact of these events, their full transformative effect on the oil industry can be assessed only in the context of broader structural changes. The multiple factors driving these shifts may not individually be seen as game-changing, but collectively they may prove sufficient to make 2011 something of a turning point.
The disruption in Libyan crude exports during that country's civil war, one of the top supply stories of 2011, is a case in point. Ultimately, compounded by other politically-driven production cuts in Syria and Yemen, this disruption triggered a release of oil from strategic storage in International Energy Agency (IEA) member countries, only the third such release in IEA history. Total estimated production losses from Libya, Syria, and Yemen for 2011, which reached 450 million barrels (bbls), were only partly offset by a release of IEA stocks and increased output from Saudi Arabia, and were clearly a leading factor behind last year's record rise in Brent crude oil prices. By year's end, however, Libyan crude had begun to return to oil markets, as field production resumed faster than U.S. Energy Information Administration (EIA) and many other analysts had expected.
The full significance of the Libyan crude disruption may best be seen as part of a broader story. The shortfall's impact, though considerable, could have been even larger if it had not been partly cushioned by exceptionally weak demand in Europe, the main outlet for Libyan crude. While the Libyan civil war may be over, production issues could linger. Just how quickly Libyan output can sustain pre-crisis levels remains unclear, as are the security and political arrangements that will replace those of the Gadhafi regime. Beyond Libya itself, will increased social spending by other regional oil producers in an apparent bid to preempt the spread of unrest, become permanent, as some analysts have suggested, creating a new revenue requirement that could lead key producers to favor higher crude oil prices to help balance their national budgets? If so, the recent events in Libya may best be seen as only one among a series of factors that evoke higher price expectations of OPEC producers and restrict the long-term availability of North African and Middle East oil supply, whether due to internal competition for barrels from domestic end-users, increased revenue requirements, or political and social pressures.