Divided Libya profits from global tensions in oil markets

Oil producers in Libya are enjoying massive windfall profits thanks to high oil prices. This is not the first time international players have turned to Libya during a crisis. But what does it mean for a country still marked by a protracted internal conflict?

Libya’s state-owned oil company announced that it had increased production to 1.4 million barrels per day last month and earned just under three billion dollars in April. That is roughly three times more than in February. The surge in oil prices therefore represents an important inflow of funds for Libyans.

The state of Libya’s energy sector

Libya’s energy sector, and indeed its entire economy, has always relied on fossil fuels. That remains true today. Most power plants run on gas, with the rest using oil products.

Since the collapse of Muammar Gaddafi’s regime, the country has been in a highly complicated state, marked by instability, corruption and chaos, which naturally also affects the energy sector.

The state-owned company GECOL is grappling with underinvestment in infrastructure and operational problems. Libya may be aiming on paper for a 22% share of renewables by 2030, but so far, reality gives little indication that this will happen.

There is potential for renewables, but under the current security and institutional conditions, almost no one is likely to invest in the country. The ruling structures also rely on the fossil fuel sector, which is itself a source of their power. As a result, most new projects remain fossil-fuel based, primarily gas-fired power plants. These are often built with support from foreign countries pursuing their own interests there.

Despite these constraints, international oil companies are returning to Libya, particularly during periods of market tension. Libyan oil is high quality and relatively inexpensive to extract, making it an attractive alternative when supplies are disrupted. The country is also believed to hold further reserves. New discoveries were announced recently, for example, and exploration of the potential for shale production is also planned in the country.

A divided state

After Muammar Gaddafi was overthrown and the political process failed after 2014, the country was effectively divided. The internationally recognised government is based in Tripoli, while the east of the country is controlled by Khalifa Haftar and his Libyan National Army (LNA).

Haftar has created a kind of clan structure and assigned lucrative roles to his sons: one leads the LNA, while the other heads a state-funded fund that oversees projects worth billions of dollars.

Tensions between the factions often play out in the oil sector, too. Haftar has repeatedly used oil export blockades as a means of political pressure on the government in Tripoli, seeking to force concessions. Although both sides are technically part of the same state, in practice they are separate institutions.

Profits as a destabilising factor

Libya’s political system is fragmented and includes numerous actors—militias, regional groups and political factions. What holds them together to some extent is oil revenue.

The current inflow of money could therefore paradoxically undermine stability. Higher profits increase the incentive for individual actors to gain greater control over the state and its resources. In an extreme case, this could lead to a renewed escalation of the conflict.

Libya has long suffered from widespread corruption and weak institutions. According to sources cited by the Financial Times, a substantial share of the revenue does not go towards public investment, but is instead distributed among various power groups.

The UN has repeatedly tried to broker a political settlement and elections that would reunify the country, but with little success. None of the key factions is willing to give up its position. The only positive sign is that the US recently managed to secure agreement between the factions on a joint state budget, at least.

The country nevertheless remains mired in long-term instability, which could be further exacerbated by the inflow of new funds. Libya is therefore stuck in a kind of civil cold war, and the influx of foreign money could heat it up.