It is almost certainly the case that oil prices would be well under $100 a barrel were it not for the current disruption of Libyan supplies and the high probability of socio-economic unrest spreading from North Africa to the major oil producing countries of the Arabian/Persian Gulf. It is also highly likely that without any further disruptions, oil prices will be under $100 a barrel and perhaps even under $80 a barrel by May. And yet, with all this turmoil, how can we explain why prices have risen to levels not seen since 2008?

Let’s start with the current disruption of Libyan oil exports and place them in the context of this winter’s oil market. There is no doubt that the loss of over 1-million barrels a day (m-b/d) of Libyan crude has a far more tangible impact on oil prices than many understand. Even if Saudi Arabia manages to replace every barrel of lost Libyan oil, oil markets would seem tight and the price of what we call benchmark crudes—West Texas Intermediate (WTI) and Brent—would be going up. These benchmarks represent at best one-quarter of the world’s supply. The remaining oil is heavier and has a higher sulfur content. That means that other crude oils – including most of the replacement barrels placed in the market by Saudi Arabia – would require desulfurization and upgrading to refine into gasoline and diesel, the two most valuable oil products. Libyan crude may represent 2% or so of the global market, but it is 10% of the world’s light sweet crude, and it cannot be replaced.

Further risks abound in North Africa, where Algeria also produces light sweet crude and, like Libya, supplies mostly the European countries bounding the Mediterranean Sea, especially Italy, France, Greece and Spain, as well as inland markets in Switzerland and Germany. Algeria and Libya combined supply close to 15% of global light sweet crude oil and the volume of their combined export is significantly higher than Iran’s, due to the growth of domestic consumption in that Middle East country.

Thus just as oil markets calmed down in the wake of the departure of Hosni Mubarak in Egypt and just as fears of a potential disruption of supplies through the Suez Canal or the Sumed pipeline (linking the Red Sea to the Mediterranean) subside, the very real Libyan disruption has again spooked markets.

Investors in financial forms of oil – futures and options and over-the-counter instruments—have clearly increased their flows into long-dated contracts expiring in December 2011, 2012 and 2013 and options markets have moved the center of distribution of options for future expiry up to higher and higher prices from the double to triple digit territory over the past six weeks. This is a tangible expression of a higher probability that prices will go up, not because of rising demand so much as because of increased perceived risk of loss of supply. Contagion of risk from North Africa to the oil-congested Arabian/Persian Gulf has accompanied the increase in demonstrations in Bahrain, Yemen and most recently Oman, increasing concerns that the Saudi kingdom might also be vulnerable.

What is fueling concerns in not just fears about current social unrest but about the ability of the leadership of oil producing countries to maintain their legitimacy given the high unemployment, rapidly growing young populations, highly skewed income distributions, higher food costs, elderly and often corrupt leaders perceived to be out of touch with today’s requirements. In this regard even the recent increase of $37 billion of spending by the Saudi government and the higher output that is meant to calm markets is having an opposite effect. It is perceived as a sign of weakness and of evidence of lower excess production capacity in the world’s largest oil exporter. What’s more, whatever happens to calm domestic unrest this year is unlikely to deal with the long-term economic problems of petro-states overly dependent on one resource and unable to diversify economies to create new jobs.

But it is equally key to understand that the high prices of this winter have also resulted from a series of one-off events that are unlikely to be repeated anytime soon, including the coldest winter in the Northern Hemisphere in thirty years, an unexpected surge in China’s diesel demand due to a late-in-the year government decision to decrease coal use in order to meet energy-efficiency goals, a major strike in France related to raising the age of retirement by one year, and a sustained period of low refinery utilization.

If there is no further disruption to supplies beyond Libya, if demonstrations cool down, the price of oil will likely follow, returning to lower levels for the rest of the year and with it lower gasoline costs and lower inflationary pressures. But the unrest and disruptions of 2011 may still well be a warning of market problems in the years ahead—the ability of new governments (along with the old regimes) in Middle East to produce the necessary quantity of high-quality crude hangs in the balance.