Six months ago, when a barrel of oil went for about $70 per barrel, the media published innumerable stories about how the world was awash in excess oil supply and weak demand would lower prices. Some pundits suggested that the return of “speculators” to the futures market was the sole reason that the price of oil rose from its 2009 low in early 2010. Others argued that because oil prices didn’t rise after the spill in the Gulf of Mexico, US dependence on oil must be waning.

Now, many of the same talking heads who wowed you with these and other spurious arguments claim that disruptions to Libyan oil production will send crude oil to $150 per barrel.

Don’t believe the hype. Libya produces 1.6 to 1.8 million barrels of crude oil per day and exports about 1.5 million barrels. The country’s oil output has been in decline for decades; in the early 1970s, not long after Muammar Qadaffi took over as the nation’s leader, Libyan oil production peaked at about 3.4 million barrels per day.

Libyan oil exports account for just 1.7 percent of the world’s roughly 89 million barrels per day of oil supply. If the world were truly awash in oil as many pundits claimed a few months ago, a 1.7 percent global supply disruption would have little or no real impact on prices.

The truth is that the global oil market remains in a precarious situation. Demand for oil continues to rise rapidly in emerging markets and has bounced back in developed markets more quickly than most had expected. According to the International Energy Agency’s (IEA) latest Oil Market Report, global demand surged by 2.8 million barrels per day in 2010, to 87.8 million barrels per day–a new record for annual consumption and the fastest rate of demand growth since 2004.

The Asia-Pacific region posted the strongest demand growth, with consumption surging by about 1.5 million barrels per day. But don’t discount the Americas: Total consumption in North and South America grew by 900,000 barrels per day in 2010, while demand from the US and Canada increased by about 500,000 barrels day.

Oil demand growth should slow in 2011–some of last year’s spectacular increase stemmed from natural rebound in demand after the 2007-09 recession and financial crisis. But global oil consumption is still projected to expand by 1.5 million barrels per day this year, to 89.3 million barrels per day. That rate of growth still ranks among the strongest in the past three decades.

Even without the recent disruption to Libyan output, oil production would have struggled to meet ongoing demand growth. Don’t believe commentators who point to US oil inventories to back up their argument that the world has an abundance of oil.

Source: Bloomberg

This graph tracks total US oil and refined product inventories, excluding the Strategic Petroleum Reserve. As you can see, the US remains well-supplied, though the pace of inventory drawdowns has increased significantly since last summer.

Let’s put these numbers in context. The US currently has about 1.06 billion barrels of oil in storage and uses around 20 million barrels per day. In other words, the US has just 53 days worth of oil consumption in storage. Although that’s a comfortable amount, it hardly represents a country awash in excess oil supplies.

Most investors also pay far too much attention to US oil inventory statistics. If you’re a futures trader following oil on a day-to-day basis, oil inventories are a key statistic to watch. And on a short term basis, excess oil in storage at key hubs can have unusual effects on crude oil markets; for example, the current glut of oil in storage at Cushing, Okla. has weighed on the price of West Texas Intermediate crude oil. I explained this discrepancy at great length in Oil: $100 isn’t a Magic Price.

But there’s a big difference between the short-term impact of excess inventories and the long-term problem that global oil supply isn’t keeping up with rising demand.

A more meaningful argument is that OPEC has plenty of spare capacity–oil production that can be ramped up quickly and sustained. Currently, IEA estimates show that OPEC-11 spare capacity stands at 5.15 million barrels per day of oil production, equivalent to slightly less than 6 percent of world oil supplies. Saudi Arabia accounts for about 3.5 million barrels per day of this total, while the United Arab Emirates accounts for about 330,000 and Kuwait and Nigeria account for roughly 250,000. In short, the bulk of global spare capacity is located in Saudi Arabia.

There’s no way to know how much oil Saudi Arabia can produce; the country is secretive about the state of its oil fields. Some have questioned the country’s ability to produce oil at the 12 to 12.5 million barrel per day the Saudis claim is possible. The country is definitely capable of expanding its output and has done so in the past, but estimates of the country’s spare capacity involve a great deal of guesswork.

Although 5.15 million barrels per day of spare capacity is a far healthier level than the 1 to 1.5 barrels in 2008, it’s hardly a luxurious cushion against supply shocks. And much of the spare capacity is illusory. The Saudis have pledged to boost production to offset lost Libyan output, but much of much of the country’s spare capacity is believed to be in the offshore Safaniya field in the Persian Gulf. Safaniya is the world’s third-largest oilfield and the largest offshore producer, but the oil in this field contains more sulfur and is more difficult to refine than crude oil produced in Libya. Although the Saudis may be able to pump more oil, it’s unclear how much of that spare capacity is light, sweet crude oil.

Outside OPEC, producers have steadily increased output to meet demand. But production in non-OPEC nations is becoming harder and more expensive. Companies are increasingly tapping fields in the deepwater and other areas with higher production costs.

The Libyan situation serves as reminder that even a relatively small disruption in global supplies will have a major impact on oil prices. Global oil supplies are far tighter than many investors imagine.