As chaos worsens in Libya, USIP’s Raymond Gilpin assesses Libya’s management of its oil resources and the economic impact of the country’s instability.

March 10, 2011

As chaos worsens in Libya, USIP’s Raymond Gilpin assesses Libya’s management of its oil resources and the economic impact of the country’s instability.

What role has oil played in the Libyan crisis?

Libya’s petroleum sector has been critical in shaping its political economy. Although Libya ranks 17th among global oil exporters, its 46.4 billion proven oil reserves are the largest in Africa (almost the size of Nigeria and Algeria combined). Over the decades this sector has provided significant resource inflows for Col. Muammar al-Qaddafi, who oversees a highly personalized ‘republic of the people’ called a Jamahiriya.

Oil revenues laid the foundation for the establishment of a rentier state (i.e. one that primarily relies on rents from natural resources for growth, rather than domestic productivity), while the Jamahiriya facilitated absolute rule. The rentier state is responsible for mass unemployment and poverty since the vast majority of Libyans without access to oil rents hardly benefit from the country’s wealth, while the Jamahiriya (which is also the conduit for the distribution of oil wealth via a patronage network) effectively eviscerated opposition politicians.

As the dominoes started falling across North Africa, it was only a matter of time before unrest spilled over in Libya.

However, Libya is different. Without a history of opposition activity the rebellion has been poorly coordinated and clear leaders are hard to identify. The patronage system is strong and those benefiting from Qaddafi’s largesse (particularly the military) have been quick to rally to his side. The patronage system is very liquid, as evidenced by the more than $60 billion government deposits in local banks (an astounding 99 percent of its GDP). By comparison, lending to the private sector only accounts for 11 percent of GDP; underlying the rentier characteristics of Libya’s political economy.

Perhaps the biggest difference is in leadership. Qaddafi has a history of ignoring pleas from the international community, partly because of his oil wealth, and is likely to do so in this case unless sustained pressure is exerted by a unified international community (which is unlikely). This will make the Libyan crisis much more difficult to resolve.

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How will instability in Libya affect global oil markets?

Before the crisis, Libya exported around 1.5 million barrels per day. Since the turmoil began in mid-February, anecdotal evidence puts exports at roughly 850,000 barrels per day. There is sufficient spare capacity in the world market to make up the difference, even if Libyan exports were down for an extended period. Global markets have been rattled because Libyan crisis is likely to foment further instability and insecurity across the Middle East and North Africa. A protracted civil war in Libya could affect its neighbors. Qaddafi has a history of exporting violence. Unrest created or supported by Qaddafi’s forces or his proxies could impact global trade negatively. This is one of the many reasons why an orderly transition in Libya is extremely important.

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What are the economic implications for the United States?

The United States buys less than 3 percent of Libya’s oil, so supply disruptions are not a front-burner issue. Italy and France account for over 40 percent, while China, Germany and Spain account for 30 percent. These countries will be affected most directly and must do much more to bring about a speedy and equitable resolution to the crisis.

This does not mean that the United States is not vulnerable. As the world’s largest oil consumer the U.S. is particularly susceptible to price volatility. Fallout from the Libyan crisis has nudged the price of crude above $100/barrel; this increase has already been reflected at the pumps --- imposing additional financial burdens on U.S. businesses and households as the economy struggles to recover from the recent financial crisis.

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Could reform of Libya’s oil sector be part of the solution?

Any solution to the Libyan crisis must address two critical issues. First, the rentier state, which rewards the politically connected class and sustains the regime, must be dismantled in favor of a system that promotes entrepreneurship and opportunity for all citizens. This will also help tackle widespread joblessness and the dearth of small and medium-scale enterprises. Second, a more representative, participatory and accountable governance system must be introduced. And governance arrangements must be enshrined in a constitution.

In addition to improving the relationship between the government and its people, such moves will enhance predictability and encourage much needed capital investments and technology transfers. Libya has Africa’s most extensive proven oil reserves, yet it lags in output. Improving efficiency and making wealth distribution more equitable could underpin much needed political and economic reform in Libya.

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Is there a role for USIP?

A lasting solution in Libya requires much more than the departure of Qaddafi and his cronies. It will require strategic oversight to ensure a conflict-sensitive economic transition, technical assistance on constitutional matters, input on the development of enduring justice systems and capacity building initiatives for the nascent administrations (national and provincial) and for civil society groups. USIP’s expertise in conflict management techniques, the creativity of its Centers of Innovation and the diverse resources and training courses at the USIP Academy would be assets in this regard.

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