Libya's oil industry

When the Arab Spring broke out and spread like wild fire across the MENA (Middle East and North African) countries, not only did the decade’s long dictator regimes fall, so did the countries’ economies. Among the first industries to suffer to major setbacks were the oil markets, which constitute a major percentage of the economies of these countries.

In many respects, economic conditions in Tunisia, Libya, Egypt, and, other countries in the Middle East, are worse today than they were two years ago. Foreign Direct Investment (FDI) levels have fallen, GDP growth is down, and unemployment has increased. The optimism that engulfed Cairo, Tripoli, and Tunis during the days of the Arab Spring has subsided, largely as a result of stagnant economic conditions.

To be fair, the timing of the Arab Spring was not exactly the best. The global recession, combined with the instability that came about with the ongoing demonstrations and break of decades long status quo contributed to hampering efforts to foster economic development in the early protesting countries of Tunisia, Libya and Egypt.

Libya in particular, is a country whose oil market plundered and continues to remain unstable. The oil prices which were already volatile in the aftermath of the global financial crisis became even more unstable, especially since concerns sprung that the oil supply would be chocked off if the political problem persists.

Unlike Tunisia and Egypt, which experienced relatively peaceful uprisings, Libya experienced a bloody civil war between Muammar Gaddafi’s loyalists and army and rebels from across the country with tangible international intervention.

Economic impact

As Libya’s economy is heavily reliant upon its oil and gas reserves, the nearly six-month civil war disrupted both the production and exportation of oil and gas, damaging the economy as its most important industry was literally disgruntled following the Arab Spring.

Libya, a member of the Organization of Petroleum Exporting Countries (OPEC), currently possesses the largest oil reserves in the African continent and the fifth largest in the world with 76.4 billion barrels as of 2010. Oil production was 3.1 million barrels per day as of 2010, giving Libya 77 years of reserves at current production. Libya is considered a highly attractive oil area due to its low cost of oil production (as low as US $1 per barrel at some fields), and proximity to European markets, which was also Libyan oil’s major exporting destination.

Prior to the civil war that began in February of 2011, Libya was exporting nearly 1.8 million barrels of oil each day as well as significant amounts of natural gas. Libya’s economy heavily relies on the oil and gas industry. Energy production accounted for 95 percent of total export earnings within the country, 60 percent of total GDP, and 80 percent of government revenue. This is why the violence that tore apart the country in 2011, destroying port cities and refineries had such a profound effect on the economy.

Following the outbreak of the civil war, oil production fell to almost zero. The termination of Libyan oil production, which accounted for 2 percent of the total global output, caused prices to rise worldwide. In order to account for the loss of production from Libya, Saudi Arabia increased their production following the civil war.  

The political unrest, not just in Libya but also throughout the region has many energy firms wary of re-starting production in the event of more violence.  However, even with the continuing fear of further conflict in Libya, production is occurring, albeit at a much slower pace and less output.

The war in Libya along with tensions in Egypt and Syria also contributed to put a floor to oil prices. Throughout this period, Saudi Arabia played a central role in preventing prices from spiraling. Saudi Arabia is the largest producer and exporter of total petroleum liquids in the world, and the only genuine ‘swing producer’ in the market. Its large resource capacity allowed the country to adjust oil production rapidly hence affecting global prices. To avoid the potentially devastating effect of high oil prices on global demand and to prevent the global economic recovery from derailing, the country has expanded production in crucial periods in which the world’s economy risked falling.

Production in November 2011 in Libya was a devastating 210,000 barrels per day was its lowest level since the rebellion and exports were a meager 110,000 barrels per day from the few terminals still under the government’s control.

Since the end of the Libyan civil war, which overthrew Muammar Gaddafi, there has been continued violence involving various militias and the new state security forces. The militias include guerrillas, Islamists, and militias who fought against Gaddafi but refused to lay down their arms when the war ended in October 2011. According to some civilian leaders, these militias shifted from delaying the surrender of their weapons to actively asserting a continuing political role as “guardians of the revolution”. Some of the largest and most well-equipped militias are associated with Islamist groups now forming political parties.

Violent and deadly events have become a daily occurrence and armed militias have taken to cutting off the flow of electricity, oil, gas and water in a ploy to extract concessions from the government.

The central government has little control over the country. This weakness has fomented further public frustration at the lawlessness and insecurity in Libya, whose very territorial integrity is under threat, with two of its three provinces declaring autonomy in 2013 amid accusations of economic and political marginalization.

Thus, even though the government has shown resilience and good will to carry out the necessary changes, Prime Minister Zeidan remains a hugely unpopular figure in Libya. PM Zeidan has so far failed to stamp his authority on the country.

Shrinking revenue

The central government’s revenue is constantly shrinking. In 2012, strikes at major ports and drying up oil exports seriously undermined Libya’s ability to pay public salaries and deter foreign investment. Militias and tribesmen seized ports and oil fields across the country to press for political or financial demands. With oil being the government’s main source of income for the country’s budget and purchase of food imports, the country is eating away at its foreign reserves. Western powers which played a vital role in the downfall of former despot Muammar Gaddafi now fear the North African country will slide into instability as the government struggles to rein in militias that helped topple Gaddafi in 2011.

In late December of 2011, Libya’s primary oil exporting port, Es-Sider, announced it would resume operations in January of 2012. The port of Es-Sider suffered heavy damages during the civil war. Officials expected the port to begin loading 600,000 barrels of production by January 2012. While it is in progress, those numbers are only a fraction of the number of barrels exported from the port, which averaged 447,000 per day prior to the civil war.

Also, In 2012, Libya restarted oil production at the El Sharara field in the south of the troubled country after protesters ended a blockade The National Oil Corporation said that it was shipping the equivalent of 60,000 barrels of oil per day as it hoped to reach the field’s maximum output capacity of around 340,000 bpd within three days following the blockades of oil terminals that severely restricted oil exports.

However, oil production failed to make the cut for much of the year of 2013 because despite initial positive news from the Eastern port of Hariga, the facility remains shut nearly five months after the protestor closed it down. The output has also been grim for other opened ports.

Although it is promising that the Libyan oil industry is showing signs of repair quickly, the magnitude of damage done to ports, refineries, and drilling stations will hinder the recovery.  

PM Zeidan’s weak government has not only bestowed legitimacy to militia leaders but it has also damaged the country’s reputation abroad. This weakness is coupled with the  continued presence of Gaddafi-era officers in the military and police and the armed brigades’ capacity to influence the highest levels of government by blockading or occupying government facilities, including ministries, the floor of the General National Congress (GNC), and important oil and gas sites.

Although Britain, France and Italy are training government security forces, Zeidan’s government does not command sufficient trained forces to counter these armed groups. Moreover, the Libyan National Army is gradually uniting and gaining power, as shown by its presence in Tripoli after the militias began to withdraw towards the end of 2013.

Another major obstacle to uniting the country is the risk posed by Islamist groups. The political fight between the fundamentalist Muslim Brotherhood and the relatively liberal National Forces Alliance has caused a fair amount of political deadlock.

Thus, inept leadership, combined with the fallout from the continued oil strikes with shortages in electricity, fuel, and occasionally water, has led to a loss of confidence in the General National Council and the Zeidan government.

In the coming months, public confidence could be partially restored as the GNC is expected to launch constitutional talks, which should be followed by fresh elections. In addition it is imperative for the West and other big players in the international community to aid the Libyan government in its efforts to bring back political peace and stability to the economy, for it could have ramifications for the world oil prices in the future.