Briefing on the Unfolding Libya Situation

The Gaddafi regime has now lost control of Libya's second and third largest cities, Benghazi and Misurata, respectively. The Guardian has journalists in Benghazi and reports that the country's armed forces stationed in Benghazi have defected to the side of the protesters there, checkpoints have been abandoned by the military and are now simply being operated by traffic police, monarchy-era flags are being flown from government buildings, and there has been no violence in the streets for the last two days.

The Financial Times reported early this afternoon on a similar situation in Misurata, Libya's third-largest city and the first city in the western part of the country to fall into the hands of protesters. Misurata, which lies 200 kilometers east of the Libyan capital of Tripoli on Libya's Mediterranean coast, forms the endpoint of a line along the coast stretching west to Benghazi which is composed of cities and settlements that have nearly all been wrested from the regime.

Meanwhile, in Tripoli, protesters have cleared the streets for fear of their lives. Time Magazine spoke to a Libyan medical student in the capital who described a grisly scene:

"Most people of Tripoli are locked away in their homes. People are scared. There's a shortage of food, but what can you do? Militias have been sent out to roam the streets in cars, and they'll shoot anyone they see walking around. This is what Gaddafi is doing to try and stay in power: kill as many people as he needs to."

He went on to comment on Gaddafi's methods:

"He's using his security forces, militias, his private gangs. There are rumors he's now bringing in more mercenaries from sub-Saharan Africa via Algeria. He's going to try to keep Tripoli — or crush everyone trying."

If the clampdown in Tripoli remains effective, the situation could allow Gaddafi to regroup with remaining loyal military elements and plan to retake western cities, which he is undoubtedly currently trying to do from his barricaded residence at Tripoli's Aziziya Gates. This is clearly underway, and Gaddafi even went so far earlier today as to order a Libyan air force pilot to bomb oil fields southwest of Benghazi. The pilot, however, refused to comply and, in a dramatic gesture, instead ejected himself from his aircraft.

Is Gaddafi actively targeting his own country's oil resources? Time Magazine reports:

Among other things, Gaddafi has ordered security services to start sabotaging oil facilities. They will start by blowing up several oil pipelines, cutting off flow to Mediterranean ports. The sabotage, according to the insider, is meant to serve as a message to Libya's rebellious tribes: It's either me or chaos.

This delusional thinking on the part of Gaddafi is largely in keeping with the bizarre speech that he gave on Tuesday night, which pledged violence among protesters, using fiery rhetoric in promising to fight to his "last drop of blood." His son, Saadi Gaddafi, granted the Financial Times a telephone interview on Wednesday. He made many strange statements, including one on regime change and the prospects of harm to oil assets:

His father, he said, was preparing to work with any new regime. “My father would stay as the big father who advises,” he said. He offered no information on the state of Libya's extensive hydrocarbons industry but said that the army would be sent to guard facilities, if necessary. “The army is still very strong,” he said. “If we hear anything, we will send some battalions. When people see the army, they will be afraid.”

How the conflict will pan out is unclear. If Gaddafi is indeed targeting oil fields and pipelines, there will undoubtedly be international intervention. The international community, however, has been wary to intervene at this point. Heads of state in the European Union, including French president Nicolas Sarkozy and German chancellor Angela Merkel, have called for the EU to cut all economic ties with Libya. A consensus in the EU, however, has not been forthcoming, as Italy maintains close ties with Libya and fears another influx of immigrants fleeing Libya should the situation escalate further.

Meanwhile, the U.S. has not yet taken action against Libya either. The State Department has apparently been focused on evacuating U.S. citizens from the country, which has been a daunting task. Libya's deputy ambassador asked the U.S. and the U.N. to impose a no-fly zone over Libya in order to restrict the movements of Gaddafi's air force, but this request was dismissed.

Yesterday, Reuters reported that Libya had declared a force majeure on its oil shipments from certain ports, meaning that it was releasing itself from contractual delivery of oil due to circumstances outside its control. Today, it's being reported that half of Libya's oil production is offline, equivalent to 1% of the world's total output (on the whole, Libya accounts for 2% of output). As major oil companies pull employees out of the country and halt output, the price of Brent crude continues to climb, closing at $112 per barrel on the NYMEX today.

OPEC says it is ready to tap into its spare capacity to make up for any loss of production in Libya should the situation persist, but a complete shutdown of Libyan oil output would require Saudi Arabia to draw on half of its entire reserve supply, equivalent to nearly 40 percent of the world's spare oil. Further, the oil produced in Libya is of higher quality than that produced in Saudi Arabia, which means they can't necessarily be swapped barrel for barrel.

The amount of disruption to oil markets will be determined by the length and severity of the battle between Gaddafi and the protesters who now control the eastern part of the country. DEBKAfile opines:

The Libyan ruler has the edge over the insurgents in that his army is relatively well organized and he has an air force and navy, while the rebels are essentially civilians with no professional command center who are armed only with the weapons plundered from Libyan military stores in those cities. Even before the disturbances, Qaddafi made certain never to maintain advanced weapons at military facilities in Cyrenaica.

The sooner Gaddafi is removed from power, the sooner oil companies will be able to return, but until then, the instability will continue. As such, the outcome likely hinges on the international response, else the violence will increase and the near-term future of Libya's oil industry will remain in jeopardy.

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