Guardian - Oil price could hit $220 a barrel

Oil price 'could hit $220 a barrel'

Experts at Japanese bank Nomura raise spectre of doubling in oil price if unrest in Libya continues

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• Simon Goodley and Terry Macalister
• guardian.co.uk, Wednesday 23 February 2011 18.57 GMT
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Traders work the crude oil options pit at the New York Mercantile Exchange on 23 February. Oil prices soared as unrest in Libya continued. Photograph: Mary Altaffer/AP

The continuing violence in Libya and fears that the unrest will spread to other parts of north Africa and the Middle East could create the biggestoil shock since the first Gulf war, analysts have warned.

Up to half of Libya's oil production is now estimated to have been shut down as a result of the crisis engulfing the country – creating supply concerns that pushed the price of Brent crude above $110 a barrel, now experiencing its biggest three-day gain in a year.

Commodity analysts at Japanese bank Nomura raised the possibility that prices could perhaps hit $220 a barrel. In a note to clients the bank warned: "The closest comparison to the current unrest in the Middle East and north Africa is the 1990-1991 Gulf war. If Libya and Algeria were to halt oil production together, prices could peak above $220 a barrel and Opec spare capacity will be reduced to levels seen during the Gulf war and when prices hit $147 in 2008."

The alarmist view was partly backed up by Marco Dunand, chairman and co-founder of Swiss energy trading group Mercuria Energy. Dunand predicts that oil could rise above $150 a barrel, if the unrest continues to spread.

"I don't want to over-hype things, but there are scenarios under which oil could go above $150 without a doubt and those scenarios are to do with stability in the Middle East if things start spreading," he said. Dunand reckoned $150 was a "20% possibility".

Surging oil hit world stock markets, with the FTSE 100 closing down 73.23 points at 5924 and the Dow Jones trading down around 93 points at 12,119 as London traders went home.

Economists typically reckon that a $10 a barrel increase in the price of oil knocks about half a percentage point from global GDP growth. However, in a more measured note, Julian Jessop of Capital Economics said: "We continue to expect oil prices to drop back sharply later this year. In part this is because we think that Libya will be both the first and the last of the major oil producers to see significant disruption (and indeed that the Gaddafi regime itself will fall soon), allowing the risk premium to fade away."

The situation in north Africa and the Middle East, and the knock-on effect on the price of oil, is causing others to reconsider the issue of energy security.

Andrew Horstead, risk specialist at energy and carbon management company Utilyx, warned of the dangers of being too energy dependent on the Middle East. "The unrest we're seeing in Libya is already having an impact on oil supply but the real issue will come if the trouble spills over into Saudi Arabia," he said. "The rise in oil has also hit European gas markets, with UK gas prices for winter delivery rising 9% in a little over two weeks, while there are reports that Libyan gas supplies to Europe have also been stopped.

"The closure has sent jitters through a market already nervous about the potential disruption to Europe-bound liquefied natural gas (LNG) through the Suez Canal. The developments in north Africa and the Middle East highlight just how interconnected the energy market is and how the UK's energy supply is at the mercy of events happening in other countries. It's essential that more emphasis is placed on producing energy within the UK if we are to secure our energy supply."