Libya’s fractured oil state faces the Hormuz test

Amid the Strait of Hormuz standoff, the global energy system is reeling from one of the most severe supply shocks in decades.

Nearly 20 million barrels per day (bpd) of oil and petroleum products, along with a significant share of global LNG exports, remain disrupted.

In this context, Libya, Africa’s largest holder of proven reserves, seems an obvious candidate to provide additional supply. Its light, sweet crude is well suited to European refineries. From its Mediterranean ports, tankers can reach southern Europe within 24 hours, bypassing the perilous Cape of Good Hope.

Yet, for all its geographic and chemical advantages, Libya is unable to fill the gap.

A shadow economy that greases the wheels

Since the 2011 fall of Muammar Gaddafi, Libya has been divided, eventually culminating in a split between the UN-recognised Government of National Unity (GNU) in Tripoli and the so-called House of Representatives, based in Benghazi in the east and backed by military commander Khalifa Haftar.

Against all odds, this fractured landscape has produced a functional oil export regime – thanks largely to Arkenu, Libya’s first private oil company.

Arkenu is indirectly controlled by Saddam Haftar, the son of the commander in the east, and involves the de facto national security adviser, Ibrahim Dabaiba, nephew of GNU prime minister Abdulhamid Dabaiba. The company effectively bridges the east-west divide.

Between May and September 2024, Arkenu exported 6 million barrels; from October 2024 to February 2026, it generated an estimated $3 billion in revenue.

For both rival administrations, Arkenu has become a convenient financial valve. The east, which controls roughly 80 percent of Libya’s crude production, receives direct revenue. The GNU, which controls the central bank and the National Oil Corporation, retains formal legal authority.

Hobbled supply

Nevertheless, even with this unconventional compromise, Libya cannot come close to solving the Hormuz crisis.

Although nearly 20 million bpd of oil and petroleum products transited the Strait of Hormuz before the closure, not all disrupted volumes translated into immediate net supply loss. Rerouting, inventories and strategic petroleum reserves softened part of the shock.

Even so, the current effective global supply deficit still stands at nearly 4 million bpd, according to the International Energy Agency, while broader industry estimates place disrupted volumes between 8 million and 10 million bpd.

Libya’s production has rebounded impressively from a 2020 low of 423,000 bpd to a current average of 1.3 million-1.5 million bpd. The government targets 1.6 million bpd, with a long-term dream of exceeding 2 million bpd. But the institutional difficulties are relentless.

Pipeline networks are decrepit from years of neglect. Ports like Es Sider and Zawiya operate at below-capacity levels due to militia skirmishes and payment disputes.

Upstream investment, despite recent moves by TotalEnergies and Chevron, remains hobbled by double-layered bureaucracy – companies must negotiate with both the GNU and eastern authorities.

Worst of all, the country’s fractured security environment means that any protest or armed blockade can shut down hundreds of thousands of barrels overnight. In October 2024, a dispute at the Sharara field alone cut 300,000 bpd for weeks. Such volatility destroys Libya’s reliability premium.

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Even if Libya somehow reached its wildly optimistic peak of 2 million bpd – adding just 500,000 incremental barrels – that would cover a mere 5 to 6 percent of the Hormuz disruption. The country lacks the capital velocity, the political unity and the infrastructure to scale any faster.

What Libya offers instead is a high-value buffer. For European refiners, its short-haul logistics and low-sulphur crude provide critical operational insulation. But the macroeconomic reality is absolute. The global economy must still rely on strategic petroleum reserves and demand destruction to rebalance.

Libya’s parallel economy, as a report by a UN panel of exhibitors shows, is a clever survival mechanism – not a strategic replacement. And that distinction will shape energy markets for years to come.

Salem Maiar is a consultant in Libyan natural resources, finances and geopolitics