As oil production ramps up, peace in Libya provides a challenge to oil prices.
Rabat – Less than a month since the signing of a permanent ceasefire, Libya’s oil production is increasing rapidly.
The sudden glut of Libyan oil could provide a challenge to already low oil prices, disrupting a balance created by the Organization of the Petroleum Exporting Countries’ (OPEC) production cuts. In an industry that has been heavily impacted by the consequences of the COVID-19 pandemic, peace provides a challenge.
Libya’s oil output surpassed one million barrels a day on November 7, an important milestone for the country that is heavily dependent on oil revenues. After many years of reduced or completely halted oil production, many in Libya are happy to see their refineries roar again.
That optimism is not shared throughout the world, however.
International oil markets have struggled in 2020. A “war” over oil prices between some of the world’s top producers, Saudi Arabia and Russia, sent oil prices on a downward trend even before COVID-19 spread globally. Once case numbers and lockdowns started to make headlines, oil prices were in a world of trouble as global demand fell off a cliff.
As global manufacturing, tourism, and international travel ground to a halt, the demand for oil-based products dropped in a historic way. An industry already threatened in the long-term by climate change now faced oil prices well below anyone’s expectations. For countries whose budgets are largely dependent on oil revenues, budget deficits grew as oil prices ticked down.
Oil-producing countries across the Middle East saw their government budgets shrink by large margins. Iraq, Kuwait, Algeria, the UAE, Saudi Arabia, and many others had their national budgets for 2020 expecting oil prices between $50 and $80 a barrel. Instead, oil prices dropped, with US Brent oil dipping into historic negative prices.
Governments in oil-producing countries each year face the daunting task of predicting future oil prices in order to estimate how much oil revenue they can expect. This process is prone to overconfidence and wishful thinking.
Iraq is a prime example. It depends on oil revenues for 93% of its revenues and produced a budget based on oil prices at $56 a barrel. Kuwait went even further and expected oil prices at $81.
Painful production cuts
Oil-producing countries suddenly faced a large gap in their government revenue. In order to rebalance oil prices, they decided on painful production cuts through agreements with OPEC and Russia. Countries agreed to limit their output in order to allow demand to catch up and help alleviate an oil glut that was filling up oil storage to the point where oil tankers were used to store oil instead of rapidly shipping it to refineries across the world.
Painful production cuts in OPEC member states and Russia allowed for oil prices to balance out around $40 a barrel. While this price continued to see oil being sold at a loss in high-cost oil-producing countries like the US and Brazil, for the Middle East it meant a first step to a return to normal oil prices in the mid- to long-term.
Peace in Libya
When Libya’s warring factions suddenly announced a cease-fire in August, the unexpected news was welcomed warmly across the world. A variety of countries, including Morocco, provided avenues for dialogue and a tenuous ceasefire grew into the promise of peace.
The lull in violence in Libya provided a moment of respite for Libyans who had suffered tremendously under years of brutal fighting. And as the guns silenced, Libya’s oil sector was again ready to roar. Within two months the oil-rich country had resumed its oil production and is now again producing over a million barrels per day.
Libya is eager to recover some of the $130 billion it has lost in oil revenue due to limited production during its bloody civil war.
As oil production now returns to normal levels, Libya’s role as Africa’s largest oil producer is set to return. While Libya will be happy to see an important revenue stream return, for global oil-producing countries the development provides a new challenge in its efforts to see oil prices increase.