Why all of the Concern about Libya?

We keep hearing about unrest in the Middle East and Northern Africa, with Libya being the latest country to get top billing. Why all of the concern, especially related to oil?

Libya is a relatively oil-rich country. According to the CIA World Factbook, its per capita income is more than double Egypt’s. While Egypt is clearly on a down-hill slope with respect to exports based on my earlier analysis, Libya still has high export income and little debt. The fact that revolution could hit Libya shows that it is possible for revolution to hit any of the countries in this region, not just ones that don’t have the money to maintain their promises.

Figure 1. Libya's Oil Production and Consumption - EIA

One issue that Libya has in common with other oil producing countries is a high unemployment rate, listed as 30% by the CIA Factbook. Its population has been growing rapidly also, so there are many young people looking for work. While the country provides subsidies, this is not the same as each individual being able to provide for himself or herself.

Another issue is that Libya is an oil exporter, and news sources are reporting that oil companies are closing up operations and trying to move employees out of the country. To make matters worse, the above-linked article also reports:

Meanwhile, local tribes in the North African country on Monday took control of the headquarters of an oil company in Ubari city in southwestern Libya.

So the problem is worse than just the oil companies leaving. There is also the threat (and reality) of dissident groups taking over oil company operations. There are reports of protesters setting fire to government buildings in Libya. It is all too easy to imagine protesters setting fire to oil infrastructure as well.

Figure 2. Retail fuel prices in Africa as of November 2008 (EIA) http://www.eia.doe.gov/emeu/international/IFP-2009-EN.pdf

In Egypt, there appears to be a possibility of an orderly transition to a new government, but this seems far less certain in Libya. Part of the problem is that Libya had so much oil relative to its small population that it could use wealth to pay high subsidies on fuel, and most likely on food as well. With all of these subsidies, it was relatively easy for Moammar Gadhafi to remain in power for more than 40 years. The Financial Times writes about countries with high “rents” from the oil industry (or other industries) not needing to put in place the political structures that other countries have. With Gadhafi remaining as dictator for so many years, the tradition for elected government had not really developed. According to the Financial Times:

The history of economic development suggests that rent-ridden countries create governments with few incentives to build strong political institutions or listen to their people. In Egypt, for instance, these various rents account for about two-thirds of foreign exchange earnings. Directly or indirectly they generate at least a third of government revenues. This is not as large as other oil exporters in the region, like Libya, but substantial nonetheless. And Egypt’s state, in common with others across the Middle East, has used these rents to appease and suppress dissent, creating circumstances in which they have little need to develop competent political institutions.

Even if the people of Libya and Bahrain join those of Egypt and Tunisia in overcoming their cursed political systems, the economic manifestations of their rent curses will remain. Even if they become more democratic, because these countries benefit from substantial rents they will have less need to tax their peoples. This precludes the need to reform state controlled industries to create private sector wealth. It also will stop the development of genuine democratic systems, the usual basis for the legitimate taxation of citizens.

Weak economic institutions will be the consequences of these nations’ ongoing reliance on rents. These will fail to deliver essential services, such as education and skill creation, in turn limiting the pool of entrepreneurial talent. Such institutions also create bloated bureaucracies, weak legal enforcement of property rights, and obstacles for starting businesses, especially for those outside the regime’s inner circle. Without reforms the private sector will still likely thrive only through connections to a rent-addled state, not because of the raw dynamism found in many Asian countries.

With a weak governmental tradition, appart from the dictator in charge, one concern is that the country will dissolve into civil war, which will ultimately break up the country. Libya’s historical leadership has come from a network of tribes, and it is possible that the country will break into pieces, reflecting tribal alliances. Such an environment could be a poor one for oil companies, especially if protestors have set fire to important oil infrastructure.

We take for granted that oil production in the Middle East and North Africa will continue as planned, and that the reserves that these countries have can actually be extracted in coming years. But for oil and gas production to continue, there needs to be a government in place that provides at least some basic services and keeps order. In Libya, there is a threat that such a government won’t remain in place. If this kind of break-up is a possibility in Libya, it raises the question of whether it could happen elsewhere–in a worst case–Saudi Arabia.

All of the concern about Middle Eastern and North African protests is raising the price of oil. Because of the connection of high oil prices with recession, high oil prices are in and of themselves a concern. Also, higher oil prices make it harder to pay back debt, and tend to worse problems with debt default that are already threatening European countries.

Another issue is replacing the oil and natural gas that is being exported. One of the issues is whether OPEC will be able to provide the support they have promised. Libya’s oil exports amounted to about 1.5 million barrels a day in 2009, based on EIA data. While this is a relatively small amount compared to world oil consumption, loss of the full amount might prove to be a challenge for OPEC to replace, if they are not telling the truth about their true spare production capacity. So far, the loss in production seems to be relatively small, we are told. The same source indicates that OPEC is to hold a special session in case of oil price soaring, and furthermore, that Saudi Arabia will make up for the shortfall in Libya’s exports.

Figure 3. Libya's oil exports by destination, according to the EIA.

But all of this is concerning to those currently receiving Libya’s exports (Figure 3). Gas imports are also at risk, and there is not a comparable back up supply for them.

Hopefully, OPEC will in fact make up oil shortfalls, and things will settle back down. But if discontent spreads to other countries, the amount of the shortfall could easily exceed OPEC’s capacity. And historical experience suggests that OPEC tends to provide more assurances than it does actual support. Theoretically, OPEC could have acted long ago, to keep world prices at $80, but now Brent oil is over $100, and an increase in supply has not been provided.

One of the big lessons that may come out of this is that we really can’t count on OPEC as much as we had hoped. First, there is the problem of oil supply from individual countries, like Libya, being reduced, because of political problems. Second, OPEC’s ability to actually deal with disruptions may be less than advertised.

This entry was posted in News Related Post, Oil and Its Future and tagged , , by Gail Tverberg. Bookmark the permalink.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

29 thoughts on “Why all of the Concern about Libya?

  1. Libya is puzzling me. My perspective is that “full bellies don’t revolt,” and that much of the mid-east uprising is coming from high food prices driven by high energy prices.

    Yet, in your map, you show Libya as the most highly subsidized fuel in Africa.

    Despite high subsidies, have there been big increases in food and fuel prices there?

    If not, are we to believe that, after fourty-some years of dictatorship, people in stable economic conditions just suddenly figured they’d be better off with democracy? (Which, after all is said and done, is just two wolves and one sheep, voting on what to have for dinner.)

    • many of these “leaders” come from a very specific era, deep in the cold war, imbued with secular ideology in the neighborhood of marxism from military institutions. They are old, and most of the circumstances of how they arose have simply gone away. with their birthrates, and with the exception of hermetically sealed countries like North Korea, a vast portion of the citizenry simply have no idealogical attachment. The “revolutions” are opportunistic, but they are driven by aspirational ideologies AND desires for justice, that justice can include things like “democracy”, but being pessimistic rarely does it look like Secular Western Liberal Democracy.

  2. The unemployment rate was listed as 30%. In a lot of countries with oil, foreigners are brought in to operate the oil companies, and there are not too many industries to hire the natives. A lot of young, unemployed folks are a problem. I perhaps should add a paragraph on this.

  3. Oil at $100/barrel, give or take Brent vs. WTI. I don’t think we’re going to come back from this; $100/barrel as the new normal low. And the cost of everything goes up from here as the value of money dilutes. Here’s a new normal as the V-shaped recovery becomes an L-shaped recovery. It will be an interesting year. We’re screwed.

    • Iaato wrote, “$100/barrel as the new normal low.”

      I’m not so sure. Look what happened after it hit $147 — the financial system melted down, a deep recession ensued, and oil crashed to $30 something.

      I think we’re in for a saw-toothed ride down the backside of the Hubbert curve. Perhaps it will hit $200, then crash down to $60. I don’t think it’s safe to peg $100 as the “new normal low.” I do think it’s safe to say each peak and dip on the whip-saw ride will be higher than before, though!

    • I had almost forgotten about the discussions a while back about the possibility of an L shaped recovery. It seems like it partly depends on how much debt defaults. Also, how widespread popular uprisings become. I am guessing that if there are major financial problems in a country (and they are not solved by an IMF loan or something equivalent), as often are not the ruler will be thrown out. In some cases, the government of the country may disappear, and the next lower level of government (state, province, tribe) will become the new highest level of government.

  4. I think realpolitiks tells us what will happen. Arab nations are now most likely to install theocratic rule initially (as in Iran) and then realise their mistake later (Iran currently). So at least two rounds of revolution are likely stretching over the next decade or so.

    The USA, Russia and China (to name the main players) will not allow themselves to be oil starved while any oil remains. Military action is likely to follow if any Middle Eastern politics stems the flow of oil. This is not pretty but it’s energy realpolitik.

  5. My guess is that things will become unstable.
    This is consistent with Chaos Theory which says that things do not transit smoothly from one stable state to another but flicker like a dying fluorescent tube.
    We have had our little stable moment when the world breathed a sigh of relief and saw “Green Shoots”.
    The fluorescent tube flicked on briefly.
    Now it flicks off again.
    Soon it will flick on again, but for a briefer time.
    And so on, until everything settles to black.

    You can learn a lot staring at a light bulb.

  6. If Libya falls, Bahrain may be next.
    60% of the Middle East is under the age of 30. With high unemployment, political disenfranchisement, rising food costs, poor advancement opportunities, government corruption and the national wealth in the hands of the ruling elite, its a wonder this has not happened sooner.
    Social media is fueling this fire and it is not going to be out any time soon, that is unless they mass murder their own population.
    Look at Iraq, eight years after the overthrow of Saddam Hussein. It is still in turmoil and we have be in charge as administrator. It is likely that once these countries overthrow their dictators they remain in turmoil.
    Jordan, Yemen, Iran, Syria and Saudi Arabia are all potential targets.
    Saudi Arabia has an oppressed Shiite minority that lives near their major oil fields and is ripe for manipulation.
    This creates a poor environment for oil industry to invest, maintain and supply the world with oil.

    It is very likely we will repeat the summer of 2008 and see $4 gasoline. Chances of a double dip recession are good.
    Fasten your seatbealts. Its going to be a bumpy ride.

    • I agree. We don’t have any guarantee that these countries are going to be able to continue to produce at today’s level, if there is no political stability. It could be a very bumpy road forward–I agree.

      • http://www.puppet99.com/?p=126
        Rothschilds Stage Revolutions in Tunisia and Egypt To Kill Islamic Banks In Emerging North African Markets
        52 Comments »

        PwP Exclusive ©Feb 9 2011 (link to this page or at least give the source)
        Background: Tunisia has undergone increasing economic liberalization over the last decade: In the 2010-2011 World Economic Forum’s Global Competitiveness Report, it was ranked as the most competitive country in Africa, as well as the 32nd most economically competitive country globally. North Africa’s large Muslim populations are a vast business opportunity for Islamic banking and other businesses.

        Jacob Rothschild, senior member of the British branch of the Rothschild dynasty
        Contrary to popular belief, the world’s finances are controlled by privately-owned “central banks” masquerading as federal government banks in nearly every country in the world [The U.S. Court of Appeals, Ninth Circuit, ruled that The Federal Reserve (U.S.’ central bank) was privately owned in 680 F.2d 1239, LEWIS v. UNITED STATES of America, No. 80-5905].
        Though it is a carefully guarded secret, the Rothschilds and their associates own most the shares in the central banks (Federal Reserve Directors: A Study of Corporate and Banking Influence, Committee on Banking, Currency and Housing, House of Representatives, 1976, Charts 1-5) (Mullins, Eustice Secrets of the Federal Reserve 1983). With extremely little government input, the economies of Tunisia, Egypt, Yemen, Jordan, and Algeria are strictly controlled by the Rothschild’s central banks and their International Monetary Fund.
        ————————————————————————————————————————–
        THE MOTIVE: FOLLOW THE MONEY
        Islamic banks have been eating into Rothschild profits in the Middle East because: they don’t charge interest (Shariah Law), they are growing very rapidly among the world’s exploding Muslim populations, and (in these catastrophic economic times) they are more stable than western banks.
        While it is a very good thing that people are freed from the tyranny of dictators, they also need to be freed from the tyranny of economic control and serfdom. The relevant moral question is: Do the means justify the end?.

        Ben Ali’s son-in-law El Materi at the opening of his Zitouna Bank, North Africa’s first Islamic bank, last May
        Deposed Tunisian President Ben Ali’s son-in-law, Sakher El Materi, opened Tunisia’s first Islamic bank, Zitouna Bank, on May 26, 2010. Zitouna Bank is the first Islamic bank in the Maghreb region [North Africa]. The bank was a first step toward Ben Ali’s new program of extensive reforms, “Tunisia, a Pole for Banking Services and a Regional Financial Centre”, which would have undermined the power and the profits of the Central Bank of Tunisia (privately-owned by the Rothschilds and their associates).

        Tunis Financial Harbour opened last October 19. Its the first offshore finance centre in North Africa.
        The Telegraph (October 19 2010) reported on the opening of the megaproject Tunis Financial Harbour –President Ben Ali’s bid to make Tunisia the regional financial centre of North Africa and beyond: “Islamic investment bank Gulf Finance House (GFH) and the Tunisian government have created the first offshore finance centre in North Africa. The centre will be part of Tunis Financial Harbour, a $3 billion waterfront development in Tunis . . . GFH, which is based in Bahrain, hopes the centre will allow Tunisia to take advantage of its strategic position on the Mediterranean sea, and operate as a bridge between the EU and the rapidly growing economies of North Africa [and subSaharan Africa].”

        Quote shortened by Gail: Sorry, copyright laws do not permit copying whole articles.

      • I’ve already learned from reading your blog that we know that none of the Middle Eastern countries will be about toe keep producing at current levels for long. In the short run, we can read that Benghazi has reliable electricity.
        http://www.huffingtonpost.com/t/workers-in-benghazi-power_1_40553486600904704.html

        Another thing to consider is that a committee to protect foreign oil workers was one of first things created as soon as the locals got time off from defending themselves from their great leader and put things in order.

        I do think it was foolish of us to think that these regimes of ours were going to last forever.

    • “Saudi Arabia has an oppressed Shiite minority that lives near their major oil fields and is ripe for manipulation.”

      If you’ve been noticing, they don’t need to be manipulated. They have long standing grievances which don’t need to be manipulated. I’d think it more accurate to say that they might be encouraged by events happening around them.

  7. I urge all to read “Crowds and Power” by Elias Cannetti. There is a tendency to believe that groups operate rationally and make decisions as an individual might. Groups do not operate this way. Groups are blind beasts and easily driven by sighted masters. Inflation and hunger trigger avalanches, but they do not cause them.

    There are ALWAYS individuals who stand to gain from shaking up the status quo. Presented the opportunity and possessing political skill, these individuals will capitalize on opportunity to realize that gain. The power of the crowd is used to realize individual gain. And individual gain, unlike collective gain, is NOT predicated on cooperative organization.

    • If a person who has something to gain from a revolution sees another oil producing country where a revolution was successful, if seems like knowledge of possible success could help encourage that person to start his own revolution. Stability is in some ways fragile. Once one country starts falling apart, it is easier for other countries to start doing so also.

  8. Pingback: Peak Oil and Libya | The Moderate Voice

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