Libya is one of the smaller oil exporters in OPEC. They were producing 1.65 million barrels per day in 2010 (through October) according to EIA data. However, the very serious political upheaval in this North African country poses a genuine threat to that production.

NEW YORK (CNNMoney) — Libya is the first oil exporting nation to be engulfed in the political upheaval spreading across North Africa and the Middle East, and investors are worried that further chaos in the region will drive crude prices even higher.

U.S. oil prices surged 6% Monday following violent protests in Tripoli, Libya’s capital, that claimed an estimated 200 lives over the weekend. The unrest is part of a wave of antigovernment protests that started in Tunisia earlier this year and spread to Egypt and other nations in the region.

Unlike in Egypt, where the revolt seemed almost orderly and never exhibited this level of violence, the situation in Libya could quickly escalate out of control. I take it seriously and suggest you do the same.

Let’s look at a worst case scenario in Libya, ignoring for the moment the contagion that might spill over from Bahrain into eastern Saudi Arabia among the Shia’ populations there. Let’s assume Libya’s oil output has been reduced to zero. What would happen? From the CNNMoney article—

“Although Libya is an OPEC member, it is still a relatively small player,” said Julian Jessop, an economist at Capital Economics. Libya, he added, ranks ninth on the list of output among the 12 members of the Organization of Petroleum Exporting Countries.

In principle, any shortfall on global markets could easily be offset by an increase in output from Saudi Arabia,” he said, adding that the OPEC leader is currently producing 3 million barrels per day less than its estimated capacity.

Jessop said the rise in oil prices since last summer has been driven largely by increasing global demand, rather than political tensions or potential supply problems.

And from the Wall Street Journal’s Libyan Unrest Gets Oil Market’s Attention

World oil markets have sufficient stocks and spare capacity to absorb even a full loss of Libyan output. The country’s oil production of 1.58 million barrels per day in January makes it the seventh-largest producer in the Organization of Petroleum Exporting Countries, but Saudi Arabia alone had 3.5 million barrels per day of spare capacity last month; any Libyan shortfalls could be comfortably covered. So far, the International Energy Agency reports output of only 50,000 barrels of oil per day has been suspended in Libya.

So there’s your standard answer: the world’s swing producer Saudi Arabia will seemlessly replace lost oil from Libya. According to the JODI data, Saudi Arabia produced 8.37 million barrels per day in December, 2010.

(Bloomberg, February 19, 2011) — Saudi Arabia’s exports fell to 6.05 million barrels a day in December from 6.36 million in November even as Saudi production rose to a two-year high of 8.37 million barrels a day, JODI said.

“This is a huge difference,” said John Sfakianakis, Chief Economist at Riyadh-based Banque Saudi Fransi, noting the 2.32 million barrel per day difference between what Saudi Arabia produced and its exports.

“It’s not clear if Saudi Arabia consumed the full 2.32 million barrels locally during that month, but what’s clear is that rise in local consumption is becoming eminent,” he said.

Let’s not worry for the moment about Saudi Arabia’s growing internal consumption eating into its export capacity, although that’s a very worrisome longer term issue. Any new oil the Saudis produce now will be available for export. In my February 12 Saturday oil report I noted that OPEC had recently raised its total production by 400,000 barrels per day. Most of that had to come from Saudi Arabia, so let’s set the Kingdom’s current crude output at 8.67 million barrels per day.

Libya produced 1.58 million barrels per day in January according the Wall Street Journal report. If their output falls to zero, Saudi Arabia must produce 10.25 million barrels per day to completely cover the loss. I have no doubt that the Saudis can produce that much, but will they? The historical fact of the matter is that—

Saudi Arabia has not produced 10 million barrels per day since the early 1980s*

* look at this EIA data set

This all may sound farfetched to you, and perhaps it is. If not next week or next month, some day in the medium-term, the Kingdom will be called upon to produce 10 million barrels per day or more. I pointed out the obvious dangers of the Saudis having almost all of the world’s spare production capacity in my post Peak Oil—Where Do We Stand?

Apparently, the concerns I voiced about whether Khurais could produce 1.2 million barrels per day in a pinch have been assuaged, if Trade Arabia’s Khurais pumps around 1 mbpd can be believed. I have no reason to doubt this report. The story sounds convincing.

However, we are still left with a big unanswered question: when the world needs Saudi Arabia to pump 10 million barrels of crude oil day in and day out, will they answer the call? Or will they let the oil price rise and rise as they did in 2007-2008 when the Kingdom’s vaunted spare capacity failed to rescue us? Even if we don’t get the answer next week or next month, we will surely know the answer by 2013. If Libya falls apart, and Saudi Arabia does not answer the call, the next oil price shock will begin now, not in 2013 ± 1 year according to my latest forecast.

That is the real geopolitical significance of the revolt in Libya.

Bonus Video on contagion in the Middle East