Libya's oil wealth: A blessing and a curse

The Central Bank of Libya announced in early January 2023 that Libya's oil revenues for 2022 exceeded $22 billion, after lifting the blockade on the oil crescent ports overlooking the Mediterranean Sea. 

Libyan oil fields are located in the middle of the country, between Tripoli in the west and Benghazi in the east. 

There are fears that each new military conflict could halt oil production, which was estimated to be 1.2 million barrels per day last year, thus reducing oil exports.

Competing for wealth

The ancient saying, 'Revolutions devour their own children' and then leave fights over wealth, aptly applies to Libya. 

Riven by conflicts between the former allies, who during the Arab Spring overthrew Gaddafi's four-decade iron-fist rule, it has become the sick man of the Mediterranean.  

In his Green Book, Gaddafi claimed to be the greatest rebel in the Arab region, Africa, and the Third World. He sought to 'correct' history, alter geography, and redistribute wealth from the rich to the poor. 

Gaddafi encouraged violence against authorities and supported separatist groups in many regions of the world, from North Africa to Ireland, South Africa to Europe, and Japan to Latin America. 

In response to Gaddafi's involvement in the bombing of nightclubs in Berlin, which resulted in casualties among German youth and American Nato soldiers, the United States launched air strikes against his Tripoli residence in the spring of 1986. 

In retaliation, Gaddafi bombed a commercial plane over Lockerbie, Scotland, in 1988, killing all its passengers. Despite later acknowledging his involvement in terrorist acts and compensating victims' families, Gaddafi remained a notorious figure to many.

In 2010, during the Arab Spring, Libyan citizens rose up against him due to the country's lack of economic and social development and poor infrastructure. 

According to the United Nations' Human Development Index of 2019, Libya ranked 105th from 186 countries covered. Today, the country remains divided politically, militarily, and geographically.

The quest of national reconciliation

The Presidential Council, seeking national reconciliation, has convened a preparatory forum to bring together influential parties and figures to help the country move on from civil war. 

It wants to create new constitutional institutions and appoint officials to lead strategic economic and financial organisations, such as the National Oil Corporation and the Central Bank of Libya by the end of 2023.

Overcoming fundamental differences will be necessary to achieve reconciliation and economic prosperity. And there are many areas of disagreement, covering national identity, nationwide security, administrative and economic decentralisation and the distribution of wealth.

Among them are entrenched disputes over the national flag and anthem, which are legacies from previous eras and based on ethnic, linguistic, and tribal conflicts in a country where clans hold significant influence over the central government.

Oil wealth funds war, not development

The Libyan economy has been in crisis since 2020 due to factors such as the Covid-19 pandemic, low oil prices, high inflation, and food price impacts from the Russian war in Ukraine. 

This has severely impacted the purchasing power of a significant portion of the population as per capita income has significantly decreased since the revolution. 

There are allegations of rampant corruption and embezzlement of oil revenue.

Before the revolution, Libya was producing around 1.6 million barrels of oil per day, which was almost equal to Nigeria's production and higher than Algeria's production of less than 1 million barrels per day, according to Opec data. 

So why doesn't the oil wealth in Libya lead to the same economic and social development as seen in Gulf Cooperation Council countries, and who is benefitting from it?

The answer is: wealth is devoted to winning the war, not to funding development. 

The army took control of a large share of the oil fields located in the middle of the country and export ports, resulting in a 66% percent reduction in production during a 2020 oil blockade that coincided with the pandemic.

This led to a 29.5 percent decrease in GDP and record losses in the balance of payments totaling $4 billion.

Armed groups have often caused disruption to oil production by blockading facilities and demanding material benefit or political goals. According to the World Bank, the ongoing armed conflict in Libya has greatly damaged the economy, reducing the size of its per-capita GDP by about half between 2010 and 2021. 

Positive indications

Nonetheless, the International Monetary Fund (IMF) expects improvement for growth and inflation in 2023, buoyed by the rebound in global oil prices. 

According to the IMF's Regional Economic Outlook for Middle East and Central Asia, published in October 2022, Libya is the fastest growing Arab economy this year, with GDP forecast to expand by 17.9%, bouncing back from a decline of 18.5% last year. 

The report also predicted that consumer price inflation in Libya will decrease to 2.6% per cent in 2023, after it was estimated at about 6% in 2022, boosting the purchasing power of citizens. 

According to the IMF, Libya will benefit from higher oil prices, as the level of economic growth is mainly due to high energy prices and strong GDP growth.

In 2021, the budget deficit turned around after the end of the oil embargo and the decline of Covid, becoming a 10.6% surplus, a significant improvement from the 2020 deficit of 64% of GDP. 

This was achieved through higher Libyan oil production and exports, and a rise in global oil prices. However, this improvement is not secure in the long run as a downturn in the global economy and the risk of recession in major economies are predicted to result in lower oil prices.

In addition, the trade and current account balances improved in 2021 and 2022 due to increased oil exports and revenue, which tripled following the lifting of the blockade in 2020. 

That helped reduce public debt, to 83% of GDP when denominated in Libyan dinar, making the debt burden less of a threat to the economy. International financial institutions believe public debt can be manageable, as long as oil production and exports remain strong.

Conflict driven by control over oil

The Libyan conflict is primarily driven by control over oil. The commodity is both the country's main source of wealth and the cause of disagreement between its opposing groups. The outcome of the war and its resolution heavily depend on who has control over both onshore and offshore oil.

Last year, the National Unity Government in Western Tripoli signed an agreement with Turkey to demarcate their shared maritime borders and explore for oil and gas in the Mediterranean Sea, in a deal that angered Greece and Egypt.

In early 2020, Turkey's supply of advanced war drones enabled the Tripoli government to successfully halt the advance of Field Marshal Khalifa Haftar and achieve a decisive victory over opponents in eastern Libya. 

In return, Turkey is seeking formal security and economic agreements to demarcate the route of a key pipeline in the eastern Mediterranean, which favours Turkey's interests at the cost of Malta, Greece, and Cyprus. 

This East Med Pipeline also conflicts with the Turkstream gas pipeline, which bypasses Ukraine and provides gas to Turkey and Europe.

Moscow does not appear to be opposed to this demarcation, even as the proposals contradict the Libyan Political Agreement signed in Skhirat, Morocco, in 2015. 

That accord says Libya must not sign any economic or border agreements with external parties until the completion of political processes sponsored by the United Nations, especially since Libya is not a party to the 1982 UN Convention on the Law of the Sea.

Resolving issues over oil in Libya may come before it reaches solutions over any other issues, according to the predictions of analysts in the country at the consulates of Western nations. 

Oil is the backbone of the conflict in Libya and is what attracts international attention compared to other sources of conflict.

The control of its production and export can provide the means to purchase external support and finance the expenses of the combatants. And even when arms are laid down, the conflict in Libya is likely to persist in non-violent forms.

Food, energy and climate challenges

Libya faces potential problems with the security of vital imports, including food, and, indeed, finished fuels, which tend to come in from nations to which it sends crude oil. 

According to statistics from the Central Bank of Libya, in 2020, Italy was the top importer of Libyan energy sources with a 54% share, while Turkey imported 12%. 

Meanwhile, Libya imported liquid fuels and gasoline from China (14.7%), followed by Turkey (12%), UAE (10.4%), and Italy (7.7%). Before the Arab Spring in 2010, Italy was Libya's main supplier with a 16.6% per cent share, and had a 28% share in 2004.

In terms of food security, Libya is vulnerable with only 2% of its land used for arable farming. This is due to the country's semi-arid climate, making it difficult for the agricultural sector to thrive.

Climate change is making this worse. Libya is already limited in terms of precipitation, and now faces several environmental challenges including a shortage of freshwater resources and an increase in temperatures. 

There is also desertification, and sand encroachment from the south and east, as well as irregular floods and cyclones. All of this can have a negative impact on agricultural production and deprive the country of rural foundations, as is the case in other North African countries.

The Russian-Ukrainian war and the resulting supply crisis have contributed to inflationary pressures on food prices, as Libya is heavily reliant on wheat and grain imports from these two warring countries, which provide 54% of its soft wheat imports, 65% of its barley imports, and 72% of its corn imports.

The prices of couscous and bread, staples of local food, increased by 80% and 34% respectively, in the first half of 2022.

These inflated prices led to a decrease in consumption and an increase in poverty and hunger, particularly among low-income families who rely heavily on food purchases for their sustenance.

Conflicting dynamics exist in Libya, where wealth of oil resources exists alongside poverty of economic and human development.

As long as warring factions prioritisie their own interests over the social needs of citizens, political disagreements will continue and progress will stall.