The Changing Libyan Economy: Causes and Consequences

Abstract

Once the United Nations suspended its sanctions regime in April 1999, Libya began to introduce socioeconomic reforms aimed at liberalizing its economy. Greeted with some skepticism, the liberalization movement gained momentum as Libya first resolved the Lockerbie dispute and then renounced unconventional weapons. Considerable progress was made in the ensuing years; however it was notably uneven, with reform to the oil and gas industry outstripping initiatives in other economic sectors. Liberalization efforts continue but they are increasingly threatened by resistance to political reform. Following more than three decades of socialist experimentation and two earlier attempts at reform, Libya at the turn of the century began to implement sweeping changes to its stagnant command economy. The promise of economic liberalization generated considerable enthusiasm for the hydrocarbon sector where a new round of exploration and production sharing agreements, modified to provide bidders a more transparent and competitive milieu, generated substantial new investment. In other economic sectors, the checkered progress to date in implementing reforms suggests that progress will be slower and more difficult. Moreover, ongoing resistance to political reform appears to pose real limits to the broader implementation of the new economic strategy. POLICY REVOLUTION In 1959, American prospectors announced the discovery of petroleum deposits in commercially viable quantities in eastern Libya. The following decade witnessed dramatic increases in both production and revenues, but not in the posted price of oil, the basis of taxable income for producing countries. Like most oil-producing states, Libya considered the posted price to be undervalued and unjust. Nevertheless, it accepted a volume-oriented as opposed to a price-oriented policy because it feared that a confrontation with the oil companies over posted price levels might slow industry development. From the beginning, revenues from petroleum exports increased rapidly, growing more than fifteen-fold from $40 million in 1962 to $625 million in 1967. Within eight years of its first shipment, Libya was the world's fourth largest exporter of crude oil, a rate of expansion previously unknown anywhere in the industry's history. In the process, Libya moved from a stagnant to an exploding economy, from a capital-deficit state to a capital-surplus state, from an aid recipient to an aid extender. By the time King Idris I was overthrown in 1969, Libyan oil exports exceeded 3 million barrels per day (bpd); however, the revenue received per barrel of oil remained one of the lowest in the world.1 Immediately after the Free Unionist Officers seized power on September 1, 1969, the Revolutionary Command Council (RCC), headed by Mu'ammar al-Qadhafi, began to implement a socioeconomic and political revolution in Libya. In early 1970, the RCC opened negotiations with the oil companies working in Libya, eventually gaining a majority control in all of them through modified participation agreements or outright nationalization. Thereafter, it pursued a two-pronged policy of controlled production to conserve reserves and price escalation to maximize revenues. The RCC was notably aggressive in its oil-pricing policy, even when higher prices were not necessarily in its best interests, because it viewed petroleum as its most effective political weapon.2 With the oil companies, the RCC pursued a strategy of confrontation to call the bluff of the international oil cartels and the Western consuming nations. In so doing, it was successful in wrestling from them additional taxes and revenues. Unfortunately, the RCC misinterpreted the political lessons to be drawn from its confrontation with the oil industry to the detriment of economic policy in other areas. Pleased with the results of its confrontational approach, it applied the same management style elsewhere only to find that none of the nation's other resources were amenable to such aggressive policies. …