Not all good news is good news

High petrol prices seem to be a part of life nowadays, but do they have to be that high?

One of the biggest drivers of recent price increases has been the turmoil in the Middle East. Most notably, the struggle against Gaddafi in Libya has knocked about a million barrels a day out of global supply.

Prior to the uprising, the Libyan regime could be counted on for a reliable 1.8 million barrels a day, give or take a few hundred thousand. Post uprising, they’re pumping an anaemic half million. That loss might not sound like a lot, out of the global total of about 87 million barrels a day (2010 figures). But the reduction, and its spooking effect on markets, is large enough to be noticed at the pump.

So with the good news that Gaddafi is gone, shouldn’t we just get a million barrels back in time for all that summer driving? If history is any guide, I’m afraid not.

Before Saddam went on his romp through Kuwait in 1990, Iraq’s oil production was about 3 million barrels a day. When George W. Bush went on his romp through Iraq in 2003, plenty of Hawks predicted good ole American know-how and free enterprise would boost Iraqi production to 4 million barrels by 2010.

How do you think that worked out? Iraqi production currently tops out at about 2.9 million – less than the pre-invasion levels of almost a decade ago. And don’t forget, this country we’re talking about has the second largest proven oil reserves in the world, after Saudi Arabia.

Here’s another example for you. Prior to the Iranian revolution of 1979, the Shah’s regime was pumping about 6 million barrels a day. Nowadays, Iran struggles to produce 4 million.

The takeaway message? Revolutions, invasions, civil wars… they don’t just hurt oil production short term. They hurt it long term and, arguably, they hurt it permanently. Oil rigs and pipelines cost a lot of money to repair or rebuild. Engineers take a long time to train. The Exxon’s of the world need significant lead times before they can start pumping.

So folks, I wish I had some good news for you on the Libyan oil front. But sad as it sounds, nothing short of a euro zone meltdown or U.S. double dip recession or bursting Chinese bubble is going to depress global demand on a sufficient enough scale to reduce the price of oil. In other words, for something good to happen, first something bad must happen.

Sub-optimal but true.