The United States has been putting pressure on Iran by trying to cut its oil exports, but it also doesn't want to push up oil prices. It has called on its allies in the Middle East — chiefly Saudi Arabia and the United Arab Emirates — to raise oil production to offset any export drops from Iran. But the global oil market remains tight, compounded by the flare-up in Libya. Now the United States and its Middle Eastern allies are moving to restore Libyan exports.
Libyan oil exports might make a quicker rebound than expected. On July 11, the head of the Libyan National Army, Khalifa Hifter, returned control of five eastern oil terminals to the National Oil Corp. based in Tripoli, the home of the internationally recognized Government of National Accord (GNA). In so doing, Hifter reversed an earlier decision to let the unrecognized National Oil Corp. in Benghazi control the terminals. The Tripoli oil company announced that it would lift a force majeure later in the day and would shortly resume to full production. In offering an olive branch to Hifter, GNA Prime Minister Fayez al-Sarraj called on the U.N. Security Council to form a committee to audit Libya's finances. Hifter, who is loyal to the rival government in the east, has accused the GNA of supporting militias that attacked the oil terminals last month.
Intense pressure from the international community may have led to Hifter's decision. The seizure of the oil terminals was restricting Libya's oil exports while the global oil market is facing a shortage and while the United States is trying to cut Iran's oil exports. U.S. President Donald Trump reportedly sent a letter this week to Hifter and other officials in eastern Libya threatening international prosecution. While the United States doesn't explicitly back Hifter, it does have powerful levers that it can pull to sanction him or freeze him out. Egypt, the United Arab Emirates and Saudi Arabia strongly support him, and the latter two are facing pressure from Trump to increase oil exports to make up for any loss from Iran. The turn of events could allow Libya's oil exports to return to their pre-June levels of 900,000 to 1 million barrels per day (bpd). The five terminals that were under Hifter's control account for nearly 800,000 bpd of exports.
The United States, as well as Saudi Arabia and the United Arab Emirates, wants the room to pursue a maximalist strategy against Iran's oil exports. The loss of Libyan oil exports could have blunted that strategy once sanctions take effect in November. In an extreme scenario, Iran's oil exports — already down from 2.62 million bpd in April to 2.28 million bpd in June — could fall to as low as 1 million bpd. Saudi Arabia has promised to make up any export drop from Iran, but the kingdom's spare production capacity is already less than 2 million bpd, and spare capacity beyond Saudi Arabia is limited. Saudi Arabia could be pushed to the max in trying to replace Iranian and Libyan exports. Even with Libyan oil back on the market, Saudi Arabia may have to cut deep into its spare capacity; that move has never been fully tested and is a policy position that makes Riyadh uncomfortable.
Yet Washington doesn't want to ease off its position on Iran and be forced to give out numerous waivers allowing Iran's customers to continue importing large volumes of its crude. The U.S. strategy is partly designed to starve Iran of its oil revenue and compel it to change its regional behavior or even possibly force a change in the government. But the United States is largely alone on that strategy — with the noticeable exceptions of some U.S. allies on the Arabian Peninsula and Israel. If Libya's oil exports go offline for an extended period, Iran's customers would forcefully pursue exemptions to U.S. sanctions. The possibility of exemptions is unclear, but U.S. Secretary of State Mike Pompeo said the administration will consider it.
Though pressure has worked to bring Libya's oil back to the market, the country still faces an unresolved conflict. Libya has two rival governments and frozen political negotiations. Hifter has defied his foreign backers before and has now shown that he is willing to exploit his control of oil revenue to exert political pressure on western Libya. Should the conflict turn into one that the rival institutions can't resolve, Hifter may move to ensure that he controls oil revenue so he can take advantage of that resource.