For decades, Libyan oil has been a linchpin of European oil-supply security. In 2011, the British and French even went to war partly for this reason. Conventionally speaking, the ongoing Libyan civil war imperils this supply channel. In a recent OilPrice piece, Nick Cunningham argued amidst last week’s fall in oil prices: “markets are overlooking the possibility of a serious outage in Libya as civil war drags on.”
Yet today’s markets and geopolitics suggest that Libyan oil no longer matters. We have witnessed the United States employ sanctions and other policies to take oil off the market, which it then fills with its own growing production. The nationalization of Middle East oil and decline of U.S. production in the 1970s created the paradigm that oil-supply security was a grave threat to Western power and economic vitality.
It seems the time has come, though, to revise the supply-security gospel. To be sure, a closure of the Strait of Hormuz, through which 19 million barrels per day (mbpd) pass, would derail the global economy. But losing all of Libya’s current 1 mbpd of production would have relatively little impact, and losing all of it is unlikely anyway. Libya is no longer a pillar of global supply security.
Europe’s backyard
Most believe that the 1973-4 oil price shock brought on by the Arab oil-producing countries’ (excluding Iraq) embargo changed the oil game. In fact, it was Libya.
Qaddafi came to power in 1969, threatened to nationalize his oil industry, and succeeded in pressuring companies for higher revenues. As global supplies tightened, Qaddafi’s moves initiated a region-wide push for better terms and nationalization prior to the 1973-4 embargo.
Since the early 1960s, Libyan oil was critical to European oil-supply security. The country’s light, sweet, and abundant crude was more commercially attractive, but its strategic value was even higher. Rather than having to traverse the minefield of Middle East pipelines and the Suez Canal to reach Europe, it was ferried easily across the Mediterranean. Western firms, moreover, such as BP, Chevron, Eni, OMV, Shell, Statoil, and Total, all either operated in Libya or held a license prior to 2011.
Libya Oil Production (thousands of barrel per day), 1965-2017
Source: BP Statistical Review of World Energy, 2018
The loss of Libyan oil in early 2011 jolted markets, sending price to its highest point this decade. Threats to the Strait of Hormuz in 2011-12, another loss of Libyan oil in 2013, and other instability in the Middle East, kept prices above $100/barrel.
Libya’s middling production since 2013 has reset the market, and made its volumes marginal at best. An uptick in violence in Libya in April sent prices to their 2019 high, but this was ephemeral and temporary, triggered more by traders capitalizing on the story. We should not feed this frenzy.
The shale era is here to stay
At first, the Arab uprisings from 2011-14 appeared to reinforce the traditional 1970s energy-security paradigm. The focus on Libya was certainly warranted then. But, in retrospect, what was even more remarkable was that prices did not climb even higher during this period.
It is also remarkable how little the loss of Iran and Venezuela in recent years has moved markets. As we saw in both cases, and in Libya as well, oil still flowed to export markets. The more localized power centers in the Middle East that have arose from the Arab uprisings in Iraq and Libya may even make Middle East oil safer than ever, as they decouple oil from national politics.
The cardinal factor, however, is surging U.S. production. The U.S. Energy Information Administration projects the United States to produce 12.45 mbpd in 2019, up from 10.96 mbpd in 2018. In 2020, it will reach 13.38 mbpd. This alone will more than make up for any losses from Libya.
Western disinterest
Now, Libya seems desperate to make the West care about its oil. On May 9, the UN and EU-supported Government of National Accord (GNA) suspended the operations of 40 foreign firms operating in the country, including French major Total. Then, on May 10, the GNA-controlled National Oil Corporation (NOC) announced that it held meetings with Houston-based companies for $60 billion of new contracts. The NOC aims to increase Libya’s oil production to 2.1 million barrels per day by 2023.
These developments indicate that Libyan oil is still very much up for grabs. The GNA is signaling its willingness to let Washington develop its oil at Europe’s expense. But it is negotiating from a position of weakness. Last month Trump, prompted by Egypt and the UAE, held a call with rebel leader Khalifa Hifter, whose recent offensive on Tripoli fortified his position.
At best, Trump seems mildly concerned about Libyan oil. The GNA’s deals with U.S. companies are not concrete commitments of capital. Moreover, on May 12, the GNA walked back its call on suspending European firms, suggesting the announcement was meant to bring diplomatic pressure. Trump will keep his options open for U.S. companies. Yet he exhibits little urgency to make sure Libyan oil stays on the market.
The ongoing civil war in Libya is often forgotten in Europe. Unlike Syria, Libyan migrants are not flooding Europe and dividing its body politic. In the past, of course, Libya has served as a launch pad for refuges from sub Saharan Africa, a dynamic worth bearing in mind as the conflict proceeds. The boardrooms of Western oil companies will always be interested in Libya, but political risk will make them tread carefully. They may be the only players who are.
