Libya - Politics of Oil

Politics of oil

The economic base for Libya's revolution has been its oil revenues. However, Libya's petroleum reserves were small compared with those of other major Arab petroleum-producing states. As a consequence, Libya was more ready to ration output in order to conserve its natural wealth and less responsive to moderating its price-rise demands than the other countries. Petroleum was seen both as a means of financing the economic and social development of a woefully underdeveloped country and as a political weapon to brandish in the Arab struggle against Israel.

The increase in production that followed the 1969 revolution was accompanied by Libyan demands for higher petroleum prices, a greater share of revenues, and more control over the development of the country's petroleum industry. Foreign petroleum companies agreed to a price hike of more than three times the going rate (from US$0.90 to US$3.45 per barrel) early in 1971. In December the Libyan government suddenly nationalized the holdings of British Petroleum in Libya and withdrew funds amounting to approximately US$550 million invested in British banks as a result of a foreign policy dispute. British Petroleum rejected as inadequate a Libyan offer of compensation, and the British treasury banned Libya from participation in the sterling area. In 1973 the Libyan government announced the nationalization of a controlling interest in all other petroleum companies operating in the country. This step gave Libya control of about 60 percent of its domestic oil production by early 1974, a figure that subsequently rose to 70 percent. Total nationalization was out of the question, given the need for foreign expertise and funds in oil exploration, production, and distribution.

Insisting on the continued use of petroleum as leverage against Israel and its supporters in the West, Libya strongly supported formation of the Organization of Petroleum Exporting Countries (OPEC) in 1973, and Libyan militancy was partially responsible for OPEC measures to raise oil prices, impose embargoes, and gain control of production. As a consequence of such policies, Libya's oil production declined by half between 1970 and 1974, while revenues from oil exports more than quadrupled. Production continued to fall, bottoming out at an eleven-year low in 1975 at a time when the government was preparing to invest large amounts of petroleum revenues in other sectors of the economy. Thereafter, output stabilized at about 2 million barrels per day. Production and hence income declined yet again in the early 1980s because of the high price of Libyan crude and because recession in the industrialized world reduced demand for oil from all sources.

Libya's Five-Year Economic and Social Transformation Plan (1976-80), announced in 1975, was programmed to pump US$20 billion into the development of a broad range of economic activities that would continue to provide income after Libya's petroleum reserves had been exhausted. Agriculture was slated to receive the largest share of aid in an effort to make Libya self-sufficient in food and to help keep the rural population on the land. Industry, of which there was little before the revolution, also received a significant amount of funding in the first development plan as well as in the second, launched in 1981.

Libya continued to be plagued with a shortage of skilled labor, which had to be imported along with a broad range of consumer goods, both paid for with petroleum income. This same oil revenue, however, made possible a substantial improvement in the lives of virtually all Libyans. During the 1970s, the government succeeded in making major improvements in the general welfare of its citizens. By the 1980s Libyans enjoyed much improved housing and education, comprehensive social welfare services, and general standards of health that were among the highest in Africa.

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