Iran oil shock jolts Libya’s fortunes, but old fault lines complicate national recovery

Having reached the 90-day mark on May 28, the US-Israel-Iran war and the energy shock it unleashed have already produced a number of global losers as well as some clear beneficiaries. Among those benefitting is Libya, which is capitalizing on surging oil prices as its battered energy sector shows renewed momentum.

Power brokers in the fragmented North African state are sounding bullish. Belgacem Haftar, son of eastern Libyan strongman Khalifa Haftar, recently vowed to make up for decades of “lost years” under longtime ruler Moammar Gadhafi.

His remarks were intended to highlight development efforts under his supervision as head of the Libyan Development and Reconstruction Fund in eastern Libya after years of civil war and state collapse, efforts that should theoretically benefit from higher oil revenues. More broadly, however, the younger Haftar’s comments came amid signs that the North African exporter could finally convert its vast hydrocarbon wealth into something resembling national recovery.

Whether it can do so remains uncertain, but several trends are aligning in Libya’s favor.

Disrupted energy flows through the Strait of Hormuz have created a windfall for producers outside the Gulf at a time when the North African oil exporter has just ramped up output. In April, Libya’s crude production reached roughly 1.4 million barrels per day, its highest level in more than a decade.

Simultaneously, international oil companies searching for new supplies are returning to the country, and European governments are betting on more North African energy production. In May, Italian Prime Minister Giorgia Meloni met with Abdul Hamid Dbeibah, prime minister of Libya’s internationally recognized Government of National Unity, with talks heavily focused on energy cooperation.

Meanwhile, the United States has lately intensified efforts to stabilize Libya’s fractured political landscape. In April, the rival administrations in the east and west approved Libya’s first unified budget in more than a decade under a Washington-brokered agreement.

Yet all this momentum cannot overshadow the enduring challenges in the country, which continues to be divided between governments, armed factions and entrenched patronage networks. Rampant corruption persists, as various actors siphon off oil revenues, and the economy staggers along. Despite a tenuous peace since a 2020 ceasefire, the security situation remains volatile. 

An oil windfall, though suggesting progress, is unlikely to resolve Libya’s many issues. The economic incentives in favor of maintaining the status quo will only get stronger as energy prices rise, according to Riccardo Fabiani, North Africa project director at the International Crisis Group.

“Authorities in east and west Libya have no reason to undermine the current arrangements, which see a divided Libya able to maintain a degree of security thanks to a series of understandings to redistribute revenues to both sides,” Fabiani told Al-Monitor. “As long as oil prices are high, both sides are likely to remain supportive of the status quo and have little interest in altering a precarious but profitable situation.”

Shifting tides

Foreign interest in Libya’s underdeveloped energy sector was already growing before the Iran war erupted. On Feb. 11, the National Oil Company (NOC) awarded its first licensing round in 17 years, attracting players interested in the country’s untapped potential. Libya holds Africa’s largest proven oil reserves at roughly 48 billion barrels as well as its fifth-largest natural gas reserves at around 53 trillion cubic feet (tcf).

Since the outbreak of the war in the Gulf, the case for investing in Libya has only grown stronger. According to Geoff Porter, president of North Africa Risk Consulting, oil companies recognize that the Hormuz crisis is both a temporal disruption and a structural change. 

“Libya certainly has its constraints, but it also just as certainly has capacity that can be tapped in the near term,” said Porter. Longer term, however, firms now know that Hormuz could be closed again, he added, pushing them to look for assets that are not beholden to choke points, such as those held by Libya and Algeria.

“Libya is no doubt a complicated investment environment, but it can be navigated, and its risks can be mitigated,” Porter said. 

Against that backdrop, industry activity continues moving forward. In April, Chevron signed a memorandum of understanding with NOC to assess shale oil and gas reserves, while Eni announced major offshore gas discoveries in March totaling 1 tcf. Meanwhile, NOC has revived stalled infrastructure projects, including a delayed 80-mile gas pipeline south of Benghazi linking the Intisar field to the Brega gas distribution network.

European-Libyan links

Nowhere is renewed interest in Libya more visible than in Italy, which imports roughly 95% of its gas. Algeria remains Rome’s primary regional energy partner, but the Gulf crisis has nonetheless pushed Italian policymakers to elevate Libya-related outreach.

In April, Italian lawmakers visited both Tripoli and Benghazi to assess whether exports can be increased. Politico reported in May that some officials believe relatively modest upgrades could boost exports within months, though others remain skeptical about Libya substantially increasing exports without years of investment and broader political stabilization.

The focal point is the Greenstream pipeline, linking western Libya to Sicily. Operational since 2004, it has an annual capacity of roughly 11 billion cubic meters (bcm), but flows have slowed to a trickle in recent years. Libya’s gas exports to Italy fell roughly 20% year-on-year in 2025 to a reported 1 bcm, their lowest level in decades. 

The decline reflects Libya’s deeper structural problems, including rising domestic demand and infrastructure disruptions. In February, however, NOC Chairman Masoud Suleman signaled plans to increase gas production and expand exports by the early 2030s.

The ambitions for gas face obstacles. “Libya is an oil country,” Porter remarked. “Gas is secondary, and it always has been.”

NOC’s technical capacity is centered on oil, meaning that Libya will need to partner with foreign firms to increase gas volumes, which could take years to achieve. “It is unlikely that Libya will be able to meaningfully increase Greenstream volumes by 2030,” said Porter.

A more mundane but more achievable objective, he believes, would be stabilizing Greenstream volumes to ensure that Libya establishes itself as a reliable energy partner, similar to Algeria.

US push

The Trump administration has intensified engagement with Libya as part of a strategy focused on energy security and countering Russian influence in eastern Libya, controlled by Khalifa Haftar, who maintains ties with Moscow. 

Massad Boulos, President Donald Trump’s senior advisor for Arab and Middle Eastern affairs, has been pushing the Libyan factions toward more institutional coordination while encouraging higher oil production. That effort has produced some progress, headlined by Libya’s first unified budget. The United States also recently hosted military exercises in Sirte that for the first time involved forces aligned with both rival Libyan administrations.

These developments have been well received, but observers appear skeptical that Libya is moving toward genuine reunification. 

“There seem to be limits in how far they can take the country in terms of moving past its divisions,” said Sabina Henneberg, a senior fellow at the Washington Institute, pointing to uncertainty around how to address corruption and what steps are being taken toward national reconciliation. 

“It also still remains unclear how those steps relate to the UN process of trying to move the country toward elections,” Henneberg added. “Meanwhile, various other groups and representatives around the country are still trying to undermine Boulos' efforts or remain opposed to it.”