A fight over oil revenues shows how Libya is splitting apart

Libya's oil industry has lost over 850,000 barrels per day of production in the last 6 months as a civil war rages between two rival governments based on opposite sides of the country.

The north African nation has the world's 9th-largest proven reserves, meaning the country could have a ready-made economic engine to fund its eventual post-conflict reconstruction.

Remarkably, both sides of the civil war - which pits an Islamist coalition based in the capital of Tripoli against Prime Minister  Abdullah al-Thinni's internationally recognized government, based in Tobruk - have so far treated Libya's oil resources as a national asset  that is somehow outside of the conflict.

Despite its bifurcated government, Libya still has only a single central bank with over $90 billion in foreign reserves. The central bank receives the nation's oil revenues and then uses them to pay salaries to government employees - as well as militia fighters - on both sides of the conflict.

That might be about to change. According to the New York Times, Libya's internationally recognized government may attempt to bypass the central bank and route all of its oil revenues through its own bank in the United Arab Emirates.

This makes sense: Why should oil under the recognized government's control go towards funding the rival side in the civil war? At the same time, the move could collapse one of Libya's last remaining national-level institutions.

So far, the sides have largely respected the fact that the central bank pays for at least some public services on a national scale and will be critical in any post-conflict scenario. Less virtuously, the sides may also realize that it's worth keeping a $90 billion prize intact on the expectation that they'll end up prevailing in the civil war. 

And opening up a rival central bank may actually kill off what little remains of Libya's oil industry, along with future prospects for the country's unification. Oil companies face prohibitive risks by even operating in Libya at all and the country's oil exports are almost entirely limited to off-shore sites. ISIS reportedly has a small but worrying foothold in the port city closest to Libya's largest oil fields.

With the EU and US deeply invested in keeping Libya together, oil companies may decide it simply isn't worth doing business in Libya if it will come at the expense of the central bank's viability.

"One thing that could spook buyers is a warning from the UN, EU and US. Those powers recognize the government in the east but they've also said all along that they don't want to see Libya split by new institutions," Matthew M. Reed, Vice President of Foreign Reports, a Washington, DC-based consulting firm focused on oil and politics in the Middle East, explained to Business Insider.

Buyers may also be scared off by any change in how business is conducted in Libya. As Reed notes, the civil war has had no impact on the mechanisms for purchasing and exporting oil. That predictability explains why the country's oil industry is still barely holding on - and why the central bank has remained untouched up until now.

"The main reason Libya has kept selling oil, in spite of so much chaos, is that buyers weren't asked to do anything differently," Reed told Business Insider. "Using the same contacts and company in Tripoli, buyers arranged deals and sent money to the Central Bank, like they have for decades. It was business as usual when everything else had gone sideways."

But as Reed notes, Thinni is "desperate." In a bold attempt to wrest oil revenue away from his rivals to the west, the prime minister could end up jeopardizing the last Libyan institution standing and reduce Libya's oil trade even below the 150,000 barrels a day it exported in February. Libya is already split between rival governments based in its western and an eastern half, along with a vast constellation of militia groups fighting alongside each. But if Thinni goes through with this gambit, the split may threaten to become even more permanent.Without its last coherent national institution or a single holder of foreign reserves, Libya could drift towards a Syria and Iraq-like scenario, where the country can no longer practically exist as a single geographical or political unit - no matter what the official map or the formalities of international diplomacy might indicate. 

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