Key Takeaways:
The attempted removal of Central Bank of Libya Governor Sadiq al-Kabir by the GNU's leader has escalated tensions between Libya’s western and eastern factions, threatening national stability.
The eastern faction, led by Khalifa Haftar, has responded by ordering an oil blockade, leveraging its control over the majority of Libya's oil production to influence national priorities.
The ongoing power struggle and Russia's growing support for Haftar has heightened the risk of another Libyan civil war, with military mobilisation on both sides already underway.
The crisis poses challenges for European countries like Italy and France, which have significant oil interests in Libya and must navigate the complex political landscape amid rising Russian influence.
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Central Bank of Libya Power Struggle
On 7 August, KSG assessed the consequences of a partial decrease in oil production at Libya's El Sharara fields, initially attributed to the Fezzan Anger Movement but accurately linked to militants tied to Haftar. While KSG’s broader assessment remains valid, a larger political crisis now threatens Libya’s oil production beyond El Sharara. On 25 August, Abdul Hamid Dbeibeh, leader of the internationally recognized Government of National Unity (GNU) in western Libya, attempted to unilaterally remove Central Bank of Libya (CBL) governor Sadiq al-Kabir, who has been in office since Gaddafi's fall in 2011. Once allies, Dbeibeh and al-Kabir have seen their relationship sour in recent years. Al-Kabir, seen as challenging Dbeibeh’s legitimacy, reportedly pushed for a unified government budget that included the rival House of Representatives in eastern Libya. In response, Khalifa Haftar, the de facto leader of eastern Libya, ordered the shutdown of all oil fields.
Oil embargo as a bargaining chip
Since 2014, Libya’s political authority has been split between the GNU in the west and the Russia-backed House of Representatives (HoR) in the east, dividing control over oil production. Most of Libya’s oil is extracted and refined in the east by the independent Libyan National Oil Company (NOC), while the Central Bank of Libya (CBL), also independent and located in Tripoli, is the sole institution authorised to receive and distribute oil revenue. The CBL governorship is crucial for managing the distribution of oil income between Libya's western and eastern regions. The GNU is entirely reliant on funds from the CBL, and with the east controlling the majority of oil production, the HoR can influence national policy by threatening to cut off income to the CBL through an oil blockade.
Local and International Consequences
The House of Representatives in the east, under Khalifa Haftar's military leadership, is demanding that Sadiq al-Kabir remain as CBL governor. Despite calls from the United Nations Support Mission in Libya for dialogue and a diplomatic resolution, Western-backed mediation efforts have made little headway. Since Libya's 2014 split into two government regions, Western support has been inconsistent and fractured, with both sides adopting a zero-sum mentality. As a result, with neither side willing to concede, militias on both sides are mobilising alongside the oil blockade, raising serious concerns about a potential new civil war in Libya.
The situation is further complicated by Russian support for Haftar's eastern faction. While Russia has publicly backed peaceful political consolidation in Libya, KSG assesses that its support is likely aimed at bolstering Haftar's position over the GNU in the west. In June 2024, for example, Italian authorities seized a cargo ship allegedly carrying Russian weapons to Benghazi, a key eastern government stronghold. Moreover, the political tension and growing power of the Russia-aligned Haftar faction pose a significant dilemma for Italy and France, both of which have substantial oil interests in Libya. An underappreciated challenge is that Libyan oil, primarily a light-sweet crude, is difficult to replace due to its ease of processing. While European markets might seek alternatives from the U.S., Middle East, and West Africa, Italy, as KSG previously assessed, is too deeply entrenched in Libya to withdraw easily and remains dependent on selling refined products from the oil gained from their Libyan sources. In 2023, Italy also signed a deal with the NOC to develop gas fields off Libya’s northwestern coast, just north of Tripoli. Both Italy and France, given their production infrastructure in Libya, must now consider various post-conflict scenarios, which could see the relatively stronger Haftar faction gaining greater political control over the country with Russian backing. The fundamental problem is that Italy and France need to maintain healthy relationships with both authorities in Libya and need to hedge against post-conflict scenarios that force them out of Libya.
Looking forward:
Although the GNU has made clear its intent to dismiss al-Kabir as CBL governor, the ongoing oil embargo is likely to compel them to retain him. Both authorities and their populations will suffer under a prolonged embargo, but the GNU cannot afford a larger conflict with Haftar's eastern faction.
KSG expects that even if limited conflict erupts, the GNU is unlikely to make gains in the Sirte basin, the geographically-central economic hub controlled by the eastern authority. In such a scenario, Western military support for the GNU is improbable, while the Haftar faction is likely to receive covert backing from Russia.
Russia is expected to exploit the crisis to deepen its influence in eastern Libya and bolster Haftar's position. Heightened security concerns will provide Russia with an opportunity to deploy its Africa Corps, potentially securing eastern oil fields while disrupting those in the west to weaken the GNU and threaten Italian and French infrastructure. The proximity of Niger's northern border to Tripoli-controlled oil and gas fields enhances this threat, as Russian-backed forces could help choke western Libya and undermine European oil interests in the region.
KSG expects that the embargo is likely to benefit Russia economically, as European markets may be forced to turn to relabeled Russian oil, sold through intermediaries like Turkey. While European countries may hesitate, demand for this relabeled oil from China is likely to increase.
KSG projects the embargo could reduce global supply by nearly 1 million barrels per day. While markets may initially seek alternatives from the U.S., West Africa, or the Middle East, these sources are unlikely to quickly match the lost output, as withholding supply could drive short-term profits. This supply cut, coupled with other geopolitical pressures like the war in Ukraine and rising tensions between Israel and Hezbollah, will likely push oil prices higher in the coming months.
Given the difficulty of replacing Libya's low-sulphur oil, European profits from oil-for-fuel swaps with the Tripoli government will suffer, driving up fuel prices in Libya as subsidies become unaffordable, thereby increasing social tension.
While it is challenging to predict the embargo's duration, past experience suggests it could last for six to twelve months. KSG assesses that although the Libyan economy will weaken under the embargo, the eastern Haftar faction is likely to emerge stronger once the deadlock is resolved.