LONDON (Reuters) - U.N.-backed military action against Libyan leader Muammar Gaddafi has echoed the use of international force against Iraq under Saddam Hussein, but for the oil market the implications are very different.
The following looks at some of the issues at stake.
Oil prices briefly spiked to a high of $39.99 before the U.S.-led invasion of Iraq in 2003 and then dropped back.
After Iraq’s invasion of Kuwait in August 1990, U.S. crude climbed above $40 in October of that year and was falling by the time of the intervention of U.N. forces in January-February 1991, which ended the occupation.
Concern about the loss of oil from OPEC member Libya and the possibility of unrest across the Middle East drove Brent futures to a two-and-a-half year of nearly $120 last month.
They remain only just below $116, but analysts said the mood was cautious as traders tackled extreme levels of uncertainty.
Iraq’s oil production shrank from more than 2 million bpd to less than half a million bpd in 1991, recovering to nearly pre-1990 levels a decade later and only briefly crashing in 2003.
Before violence erupted in Libya earlier this year, the OPEC member was producing around 1.6 million bpd.
Its production has collapsed to 200,000-300,000 bpd, analysts have estimated, and exports have dried up, with many in the oil market assuming they will remain at a standstill for months to come.
Some have argued disruption will continue for the rest of this year and beyond.
Analysts draw the contrast between the mission statement of the 2003 invasion of Iraq when regime change was a clear U.S. objective.
This time, the United States, under President Barack Obama has adopted a low profile, and said Libyans must ultimately determine their fate for themselves.
At the same time, the market is contemplating the possibility of much wider unrest as popular discontent reaches into Syria, Yemen, Oman, Bahrain and possibly even Saudi Arabia.
Some analysts said removing Gaddafi would be the most positive outcome for oil exports as it could mean an early end to sanctions.
The Arabian Gulf Oil Company, or Agoco, which is headquartered in rebel stronghold Benghazi, said it was making arrangements to market oil directly to foreign buyers instead of via its state-owned parent but no sales have been reported.
Apart from regime change, many commentators were convinced the Iraq war was fought to gain access to its huge oil reserves, which it said last year totaled 143 billion barrels.
Libya’s reserves are smaller at around 41 billion barrels.
However, they offer enormous potential as they were under-explored during two decades of sanctions imposed on Libya beginning in the 1980s, which limited its ability to improve oil infrastructure, although they allowed it to continue to export.
Last week, the United Nations specifically named state oil company the Libyan National Oil Corporation (NOC) in its list of entities whose assets are frozen.
At first sight the latest sanctions look draconian, analysts have said, although many predicted they would eventually prove to be leaky.
“If this lingers on, Gaddafi stays in power and it becomes a stalemate, might there be some significant sanctions leakage? Absolutely,” said Harry Clark, partner at law firm Dewey & LeBoeuf, specializing in trade and investment rules.
Already it is illegal for U.S. firms to do business with the NOC, but there could be a brief window before other national governments made the U.N. resolution binding, said one lawyer who asked not to be named.
Even so any persistent, intentional breaches, could be prosecuted retroactively, as happened in the case of Iraq.
Iraq endured years of sanctions, although the United Nations oil-for-food programme deliberately allowed for some crude to reach international markets while attempting to ensure revenues were for the good of the general population.
In addition, Iraqi leader Saddam Hussein demonstrated sanctions policing was lax and under his regime oil was smuggled over Iraq’s land borders.
In contrast, most Libyan oil is exported via Mediterranean ports, making it easy in theory for European ports to detect embargo breaches, although Libya could find more discreet routes — overland via its border with Sudan, for instance.
Libya’s top oil official Shokri Ghanem has also said Libya was considering offering oil contracts directly to China, India and other nations it saw as friends.
“The leakiness of sanctions comes from their enforcement,” said Saket Vemprala of research group Business Monitor International (BMI).
“There is an obvious Iraq-style split in the coalition, with Russia and China choosing not to go along with the rest.”
Previous sanctions regimes against Libya and Iraq hobbled infrastructure by cutting off technology and expertise.
The impact of war and violence has also been devastating in Iraq, where repeated power cuts and sabotage attacks can still disrupt supplies.
So far, analysts thought damage to infrastructure in Libya was minimal.
“Gaddafi didn’t want to shoot himself in the foot but to cut off the rebels’ ability to finance a long-term insurrection he was careful not to cause irreparable damage because if he were able to regain control, he would need those facilities to come back onstream,” said Vemprala of BMI.
Gaddafi forces have steadily regained control of major export terminals, with only Tobruk and Zueitina thought to be held by rebels.
Exports from these two ports amounted to around 265,000 barrels per day before the conflict, according to the International Energy Agency.
Oil trade sources said Italian oil firm Eni fixed a crude cargo last week from the Bouri offshore terminal but at least two other fixtures were canceled and there have been none since.
“There are no fixtures at all. Very few owners would be willing to go there and even if they would, I’m not sure they could make it past the naval blockade,” said a crude oil trader, operating in the Mediterranean.
Editing by James Jukwey