Libyan rebel fighters stand guard at the entrance to the Zawiyah oil refinery after seizing control earlier this month: Experts say Moammar Gadhafi's fall may cause oil prices to drop.

REUTERS/Bob Strong

efore Libya was consumed by civil war, the North African nation was a major oil producer, responsible for roughly 2 percent of global supply. Now, with rebel forces advancing on Moammar Gadhafi's hometown of Sirte — the last major stronghold of his allies — many analysts believe that the war's end will have a significant effect on energy markets. Oil prices fell Monday in reaction to the news that insurgent forces had captured much of Tripoli, but then rose Tuesday as fighting continued. What would Gadhafi's defeat mean for oil prices in the long run?

Expect a big, welcome drop: I "expect oil prices to fall when highly desirable, sweet Libyan crude production is fully resumed and enters the pipeline," says David Kotok at Business Insider. If we're lucky, U.S. car drivers might actually return to those heady days when per-gallon gas prices started at $2. And remember, even just a one-cent decrease in the per-gallon cost of gasoline means Americans have an additional $1.4 billion a year to spend on other stuff — that's a "huge stimulant to the economy."
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But production might take a while to ramp up: "We're still a long way from cheap gasoline," says Neela Banerjee in the Los Angeles Times. We don't yet know if Libya's oil reservoirs, pipelines, and refineries were damaged in the fighting, and even if they weren't, it will take time to get the crude flowing again — up to 18 months, according to Libya's top oil official, Shukri Ghanem. But "unlike, say, Iraq after the American invasion, the Libyans have the bureaucrats, engineers and workers in place to bring their industry back on line."
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Let's face it — oil prices are unlikely to plummet: "Don't expect oil prices to drop too much further," says Brad Plumer in The Washington Post. When fighting broke out in Libya, Saudi Arabia ramped up its production to help compensate. If and when Libyan crude comes back to the market, I expect that Saudi Arabia will simply cut back production in an effort to keep price levels steady. We'll be right back where we started before the war.
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