Whether oil is cheap or expensive depends on one’s view, positions, or expectations. In other words, it is relative. The same goes for the impact of the weekly statistics produced by the EIA. The perceived quality of the data is relative to the previous night’s API release, and often it is not based on the actual numbers. Yesterday was a good example. After a buoyant start to the day, a rather mediocre set of stock figures fuelled further buying, just because major categories either went against the findings of the API (crude oil) or showed less builds than the preceding night (gasoline and distillate). Products supplied, the proxy for demand, fell under 20 mbpd and domestic production reached a fresh all-time high of 13.4 mbpd. The weekly stats did not exactly suggest a tight US summer where travellers crisscross the country in their SUVs ebulliently or spare no expenses to fly abroad. No doubt, the upbeat performance was also aided by persistent Middle East tension and the Libyan force majeure declared on output in the Sharara oil field.

The assurance from the deputy governor of the Bank of Japan that rate hikes are not forthcoming also contributed to yesterday’s march north but a sobering slap in the face arrived later in the day as US equities were sold off before the close. Volatility prevailed and the performance of the stock markets also served as a reminder that anxiety about a possible tech bubble and worries about recession, whilst mitigated, have not completely evaporated. The bounce off Monday’s troughs was encouraging but not conclusive.

The Trouble with Libya

Any mention of Libya to oil traders will most often be greeted with a proverbial roll of the eyes or shrug of the shoulders indicating exasperation at the randomness in which the north African country’s oil production suffers shut-ins that may last days or months as settlements to local gripes and monetary claims are achieved. The Libyan National Oil Corporation remains somewhat silent on its intentions or how long the current hiatus in production at the Sharara oil field will last. In the southwest area of Libya, people in the Fezzan province are staging a sit-in strike, similar to the one that occurred in January of this year when demands seemed to be met by the NOC over social and economic environment of locals. As silent as the state-owned oil company is concerning the current stand-off, what troubles protestors this time and what demands might be are also unclear. Although some media suggest that the stand-off is inspired and inflamed by the arrest of a son of the Libyan army leader.

Libya’s initial successful well head was drilled in 1959 and the country began its first exports 2 years later, subsequently joining OPEC in 1962. The significance of Libya’s historical influence in oil production cannot be understated, nor can its decline. For context, in 1970 Saudi Arabia was producing 3.8 million barrels per day, Libya 3.4 million. The success of Saudi is there for all to see, reaching dizzy heights of 13 million barrels per day and beyond, Libya stands in direct contrast with current production just a third of the halcyon 1970s. Saudi is a story of making the most of its incredible 270 billion barrels or so of oil reserves, whereas Libya’s is one of utter underachievement. According to various sources, Libya holds 48 billion barrels of reserves, some 40% of Africa’s total, therefore its inability to make good on its oil industry is not through the lack of resources.

The importance of oil in Libya, even in its shrunken and poor performing state, is not lost on foreign monitors, potential investors, and debt enablers such as the IMF. The fund observes Libya's short and medium-term economic outlook is dominated by the dynamics of hydrocarbon production. Libya urgently needs a clear economic vision for the future and with few other alternatives, it must tidy up its oil industry because any attraction to investment can only come via revenue from oil sales. As the African Development Bank notes, peace remains fragile as election challenges are still unresolved. The economy is projected to grow at 7.9% in 2024 and 6.2% in 2025. This is, however, under the assumption that oil and gas prices and production remain stable. Libya has never really enjoyed a stable state of oil well being.

After Muammar Gaddafi led a coup to displace the monarchy and then having wrested control of oil production from foreign oil companies, Libya did enjoy a period of relatively steady oil production. However, involving Libya in foreign terrorism and experiencing the ire of the United States and U.N. sanctions, infrastructure became under-invested and underperforming. With Libya’s abandonment of nuclear ambitions and a thawing of diplomatic relationships, production steadily grew in the first decade of this century to 1.8mbpd, until the overthrow of Gaddafi and the civil war in 2011 when production collapsed to 500kbpd. Fast forward to a country that has two governments, in two separate areas, supported by two sets of foreign meddlers. It is inconceivable under such circumstance that foreign investors can be attracted to aid Libya in fulfilling its potential. Without sustainable economic growth, borne out of petrodollar income, the North African underachiever will continue to be stuck in this this cycle of economic self-harm. Oil contracts are reported to have increased to Spain and Italy. A succession of force majeures or any sort of non-performance will usher in another period of mistrust. Libya’s issues are currently a bullish driver for oil prices, clearly longevity dependent, but the longer misbehaviour in deliveries goes on, eventually Libyan oil will be shunned, and it will once again be dropped into the bin of irrelevance. 

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