As a result of the power struggle between the two governments in Libya, roughly 70% oil production in the country has been shut down. This could significantly impact global oil supplies and is a glimpse at the instability within Libya.
The Libyan National Oil Company halted production at the major fields, which takes ~700,000 barrels of oil offline every day. The western government in Tripoli and eastern government in Benghazi are both vying for control of the country’s oil revenues, but no one is getting much of anything right now.
This shutdown could carry implications for European countries like Italy, which refine much of Libya’s crude. It could also ramp up demand for US crude, which the Americans won’t be mad about. The fallout of all this shouldn’t be too large, but could spell trouble for the future of Libya and its energy sector.
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Hey, everybody. Peter Zeihan here, coming to you from a bright Colorado day. Today, we’re going to talk about a country that I haven’t brought up in over a year—Libya. Basically, the Libyan National Oil Company announced that it’s shutting down production at a couple of major fields. Collectively, Libya produces about a million barrels a day.
The announcements were going to affect over 70% of that. Whether or not there’s going to be more, we don’t know. This is a crazy story. If you remember back to the 2000s, in the early days after the Iraq war, a number of governments were led by tinpot dictators who were so arrogant that they were convinced that the Iraq war was actually about them. It was a warning for them, and so they rushed to cut deals with various powers to make sure that they weren’t the target of the already planned invasion. In the case of Turkmenistan, you had a guy basically rush into the Russians’ arms. In the case of Libya, you had Gaddafi appealing to the United States and voluntarily turning over his proto-WMD program to try to make sure that he wouldn’t be knocked off like Saddam was.
Well, that was the beginning of a series of processes that led to a little bit of a political opening in Libya, which ultimately culminated in a bit of a civil war with NATO special forces. After six months of just waiting for somebody to take off, Gaddafi basically led these militant forces to the presidential palace, and the government collapsed.
Since then, a new government has been put in place, internationally recognized and based in Tripoli. But they were supposed to have elections over ten years ago, and they never did, so they lack legitimacy. That’s in the western part of the country, where most of the people are. In the eastern part of the country, you’ve got another government based in Benghazi, which is a mix of Russian-backed groups, mercenaries, Islamists, and a guy named Haftar, who’s a real asshat.
What has been going on in the last 12 years is that all of the oil—most of which is produced by the eastern government—is processed through the central bank, which is the only institution in the country that has access to foreign currency and can do forex transactions. It is headquartered in the western part of the country, where the legitimate government is.
Both sides have been mucking with the equivalent of the Federal Reserve in this country in order to get a bigger cut of the money for themselves and to deny any money to the other side. The most recent development is that the Tripoli government in the West has kidnapped a couple of senior staffers and tried to push out the chairman of the central bank to get their way.
So the folks on the Benghazi side, where the oil is, have said, “You know, screw you guys. We control most of the oil, so we’re just not going to produce it. No money comes in anyway.” As a result, we have 700,000 barrels a day that are going offline. It might actually increase in the days and weeks to come.
It could be offline longer than just this political dispute because Libyan oil, especially the stuff in the eastern part of the country, is very waxy. If it’s not kept warm, it basically turns everything into a soft candle, including the pipelines, which will take a lot of maintenance to clear out. This has a lot of implications for a lot of people.
The Russians are going to be pissed off because they have managed to get themselves a cut of the energy revenues. The Italians are both on the pro and the con side of this—pro in that they are the ones that end up taking and refining most of the crude that comes out of Libya just because of proximity.
But they also have refining capacity that can handle over twice what the country actually uses. They are a refining hub for southern Europe. So you’d actually have more pain in places like Spain and France and throughout southeastern Europe in the Balkans because they’re going to make money regardless. Part of the problem here is that with Russian crude no longer part of the European diet, Libyan crude was one of the substitutes.
Another big winner is going to be the United States because while the Libyan crude is waxy, it’s also pretty light and sweet and has a fairly similar chemical makeup, minus the wax, to U.S. shale crude. The U.S. exports 3 to 4 million barrels of that a day, and having another half a million to a million barrels of demand out of southern Europe is something that would make American producers quite happy.
This is just what Libya is going to look like until one side or the other wins, or the two sides come together and form a unity government, which is definitely not going to happen. The only other reason that there might be any hope is that there might be someone in Europe—France or Italy most notably—who decides to go in, knock heads together, and basically just take over the fields and run the country themselves as a colony.
We’re not there yet. We don’t have energy shortages in Europe at the moment, and they’ve managed to find a lot of ways to adapt to Russian stuff going offline. Libya’s million barrels a day is not insignificant, but it’s not enough of a shock to cause a political or military reaction out of the European countries. But it is a little bit more pressure.
So if something were to happen to, say, the Persian Gulf—which, thank God, has been one of the most stable parts of the world these last couple of years—then we’re in a different world. So it’s another thing to keep an eye on. It’s more amusing than problematic at the moment, which I can’t believe I’m saying about the loss of nearly a million barrels of crude.
But this is the world we live in today. Watch the European PMs; they’re the ones that have the agency to do something about this if stuff gets real.
