Dow Jones Newswire reports on a note by Vienna-based consultancy JBC – drawing on surveys of government officials, analysts and industry sources – which claims a loss of about 1 million barrels per day for Libyan oil output during March. Meanwhile, total OPEC output for March was also down by 411,000 barrels per day. This means that only 60% of the lost production in Libya was covered by production increases from the other eleven OPEC members. In the context of a steep rise in oil prices, to levels around $120 for Brent and $108 for WTI over the same period, OPEC’s failure to fully replace lost Libyan production is a cause for concern.

Figure 1: Brent Oil priced in Euros - the current spike is strikingly similar to the 2008 event that heralded the recession.

Concern increases further when we take five additional significant points into account:

1. Some OPEC production increases in March had been in the pipeline before Libya’s rebellion, in order to keep up with strong demand from Asia. Those increases must be deducted from the true spare capacity that was brought on-line to replace lost Libyan output.

2. Over the last 12 months, previously accumulated oil inventories are being drawn down to meet growing emerging markets demand which rises in proportion with BRICS economic performance as the Chinese and Indians buy more cars, and as oil-and-ethanol powerhouse Brazil increases its gasoline and ethanol imports.

3. Seaborne oil exports of OPEC (excluding Ecuador and Angola) are down by half a million barrels a day in March relative to February, according to British tanker tracker firm Oil Movements. This is a separate data point that confirms JBC’s analysis.

4. As summer approaches in Saudi Arabia, Saudi oil exports naturally fall as more crude is consumed domestically to power air conditioners in a country which experiences an ongoing explosion of population and electricity demand.

5. Due to inexorably rising domestic consumption, and despite rising international prices, Saudi net oil exports have steadily fallen from a peak of 9.1m bpd in 2005 to 7.4m bpd in 2010. In an interesting “coincidence”, the Saudi stock market also crashed in early 2006 just when their net oil exports started falling, and has not recovered since.

Taking everything into account, the overall picture of OPEC and Saudi Arabia failing to replace the lost Libyan production is inconsistent with the existence of the claimed 4m barrels per day of “spare capacity” supposedly held back by Saudi Arabia.

This would appear to vindicate the late Matt Simmons, author of the 2006 landmark book “Twilight in the Desert”, who, in his characteristic style, had claimed that “what passes for spare capacity in OPEC and Saudi Arabia is really oil-stained brine” – meaning that the so-called “spare capacity” amounts to the theoretical capacity of aged oil wells which have been shut down because they now yield so much water (typically over 90%) that they are uneconomic to produce, as the GOSP’s (gas-oil separation plants) were not designed to handle such a water cut and are in any case better employed to separate the output from newer wells.

On the contrary, the picture we actually observe is much more consistent with recent reporting by Wikileaks of secret conversations between Saddad al-Husseini, former EVP of Exploration for the Saudi state oil company Saudi Aramco, and American embassy officials in Riyadh, in which al-Husseini expressed the opinions that the Saudis greatly overstate their true oil reserves and that global peak oil would occur no later than 2012.

Overall, to take a step back and look at the big picture, the similarities with the first half of 2008 are striking, and they are continuing to add up: namely overvalued stock markets, “growth” which cannot be sustained, rising food and energy costs, property bubbles at or near the bursting point, and incipient or ongoing banking crises.

All things considered, it would appear that the global macro prediction made six months ago on this blog in The Next Oil Shock? is, unfortunately, several steps closer to being confirmed:

The key insight is this: if we are at the cusp of global peak oil, meaning supply cannot rise in response to price, then it is likely that periods of excess oil supply capacity induced by episodes of falling demand will tend to become shorter and shallower, so there is little room to absorb the next episode of demand growth. This means that the interval between recessions induced by oil shocks will become shorter as the supply situation worsens….

…Even if this recessionary phase “ends” soon, the “recovery” can only be short lived before energy issues force another recession.

If oil prices continue to rise at the current pace (or worse), that last prediction – made six months ago while oil prices were easing back a little – will be put to the test very soon.

Can the global economy really defy the laws of economic gravity, as the Washington and Wall Street cheerleading squad would have us believe? Or, which is more likely, will the developing oil crunch force a second global recession in three years? The fact that each of the last five major downturns in global economic activity has been immediately preceded by a major spike in oil prices does not offer any encouragement at all.