Global Economics February 23, 2011, 11:01PM EST

Calm in Saudi Arabia Speaks Volumes

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Saudi Arabia has about 3.5 million barrels of untapped daily production capacity for emergencies, the International Energy Agency says. That's more than double Libya's output. The Saudis would need at least 30 days to bring this capacity online, says Erik Kreil, the U.S. Energy Dept.'s specialist on oil market disruptions. Minister al-Naimi said on Feb. 22 that OPEC is ready to step in to meet a shortage caused by a disruption in shipments from Libya. "Saudi Arabia and OPEC will be ready to meet that shortage, if and when it happens," he said.

Despite al-Naimi's assurances, Brent oil futures, the benchmark price for two-thirds of the world's crude, have climbed 10 percent since Feb. 15—just before Libya began to unravel and passed $108 a barrel for the first time since 2008. Prices will continue to escalate while the Saudis tap their spare capacity and refiners, chemical makers, and speculative traders scramble for their piece of a shrinking global supply, Kreil says.

Oil traders are haunted by the specter of 2002-2003, when political unrest and an oil industry strike in Venezuela interrupted the flow of crude exports from one of the primary suppliers to the U.S. market. While the world waited for the Saudis to deliver on promises of extra crude, oil futures traded in New York surged 51 percent in the span of three months to the highest price since the outbreak of the first Gulf War more than 12 years earlier. A similar runup now in the Brent contract used to price Middle East crude would translate into prices in excess of $160 a barrel. If the Venezuelan experience is any guide, prices from such a spike would not stay high for long. After Saudi supplies began flowing in the spring of 2003, U.S. crude prices tumbled 37 percent in two months.

The difference between 2003 and now is that the current crisis is in the Mideast, where upheaval has proved contagious. Gianna Bern, a former BP (BP) crude trader now at Brookshire Research and Advisory, puts it this way: "The real concern is that if we see these sorts of disturbances spread to Saudi Arabia or Iran, then we're going to see turmoil in energy markets go to another level, an unprecedented level."

All the Arab states that emerged from the collapse of the Ottoman Empire after World War I are vulnerable, Stratfor's Zeihan says, because none have managed a normal transition of political power. Saudi Arabia has been under the thumb of the same family since its establishment. Even if Saudi Arabia avoids unrest this time, it has to continue Abdullah's reforms to prevent an upheaval. Says former U.S. Ambassador to Saudi Arabia Richard Murphy: The Saudis need to keep creating jobs and more importantly give their citizens "a sense of participation in government."

The bottom line: Saudi Arabia has thus far escaped tumult thanks to tighter market controls and better social programs than its neighbors.

With Peter S. Green and Steve Voss. Carey is a reporter for Bloomberg News. Carroll is a reporter for Bloomberg News.