For Libya, the Hormuz crisis can be a trap or an opportunity

Amid the worsening global energy crisis triggered by the US-Israel war on Iran, European countries, desperate for alternative energy supplies, trade routes and partnerships, have looked across the Mediterranean for solutions.

As a result, governments across North Africa have started to reassess their strategic value. Algeria is in an especially strong position as an established gas supplier, while Egypt can offer infrastructure, refining capacity and access through the Suez Canal.

Libya has also seen its strategic value increase. It has around 48 billion barrels of proven oil reserves, the largest in Africa, and produces 1.5 million barrels of oil per day. It also has substantial natural gas reserves.

Its oil reaches international markets through the Mediterranean, while the Greenstream gas pipeline connects its Mellitah complex directly to Europe.

Libya cannot replace the Gulf in terms of oil and gas exports, but it can become a major player in diversification efforts not just in Europe but elsewhere in the world. The challenge the country faces is how to take full advantage amid structural constraints and insecurity.

Libya is simultaneously a major energy exporter and an energy-insecure state. Although the country possesses vast oil and gas resources, Libyans experience regular electricity blackouts due to an inefficient domestic energy system.

More than 70 percent of Libyan gas production is consumed domestically, mostly for electricity generation. Production has struggled to meet both domestic needs and export commitments. Gas exports consequently fell year on year from around 200 billion cubic feet in 2019 to 35 billion in 2025, the lowest export levels in 22 years.

At the same time, the country is flaring at least 200 billion cubic feet of gas annually due to underdeveloped infrastructure. Gas that could generate electricity, support industry or increase exports is instead being wasted.

The International Monetary Fund has estimated Libya’s total energy subsidy burden at around $17bn, equivalent to roughly 35 percent of GDP – one of the largest in the world.

Much of these funds go into subsidising imported refined fuels, as domestic refining capacity is largely underdeveloped and cannot meet demand.

The domestic energy situation is compounded by political fragmentation, institutional disputes and periodic disruptions to production due to conflict.

Increasing exports without addressing these problems risks improving energy security abroad while neglecting it at home, and that is a recipe for more instability in an already fragile nation.

The global energy crisis triggered by the Iran war is surely a major opportunity for Libya to increase its revenues from hydrocarbons. But it also carries a risk.

As I pointed out during the 5th meeting of the Mediterranean Energy Experts Circle earlier this month, greater demand for Libyan oil and gas could reinforce the economic model the country has struggled to escape from for decades: producing hydrocarbons, exporting them, distributing the revenues and postponing structural reform.

This model does not allow Libya to capture the full economic potential of its resource wealth. It keeps the Libyan state stuck in the all too familiar “resource curse”, which promotes economic stagnation and inefficiency.

That is why when taking advantage of heightened demand for energy, it is crucial that Libya uses the proceeds to transform its energy system.

That means capturing flared gas, modernising electricity generation and transmission, expanding domestic refining where economically viable, reforming subsidies, investing seriously in renewable energy and participating in sustainable regional energy cooperation.

Libya’s National Sustainable Energy Strategy aims to have 22 percent of electricity generation from renewable sources by 2035, an ambitious target that requires major positive shifts in security and governance conditions. Increased revenue flows can help jump-start the process.

Another important consideration is how the country should approach heightened foreign interest. Libya’s first major oil and gas licensing round since 2007 was concluded in February, with the US’s Chevron, Italy’s Eni, QatarEnergy, Spain’s Repsol, Hungary’s MOL, Nigeria’s Aiteo, and Türkiye’s TPAO securing new licences.

Commercial and geopolitical interests are rarely completely separate in energy. For Libya, this creates bargaining power—if managed coherently by the Libyans. Rather than becoming an arena in which external actors compete for individual assets and relationships, Libya could use diversified partnerships to attract investment and technology while reducing dependence on any single partner.

The transformation Libya seeks should not be confined to its borders. Its strategic objective should be to become an integral player in a Mediterranean energy hub by expanding cooperation with neighbouring states and leveraging existing production capacities and infrastructure.

To Libya’s east, Egypt has a large electricity system and significant refining and processing capacity. To its west, Tunisia provides access towards the wider Maghreb and increasingly towards European markets. Libya sits between them with enormous hydrocarbon resources, considerable solar potential and existing energy connections with both neighbours.

Important steps have already been taken to deepen regional energy integration. In January, Egypt and Libya signed an energy cooperation agreement covering exploration and the development of crude-oil refining. The two countries are also discussing the construction of an 800km pipeline connecting Tobruk to Alexandria. The project is worth $1bn and would carry Libyan crude directly to Egyptian refineries.

Libya and Tunisia are also expanding cooperation. Earlier this month, the Libyan-Tunisian company Joint Oil opened an international licensing round covering around 3,000 square kilometres of shared offshore acreage and development of the cross-border Zarat oil and gas discovery. Formal awards are expected by the end of April 2027.

The risk here is that expanded cooperation could develop into dependence. How to avoid that is the lesson Libya can learn from the Strait of Hormuz crisis. The country still needs sufficient domestic electricity, refining and production capacity to protect itself. Regional integration should add alternatives rather than create new vulnerabilities: more markets, more electricity connections, more processing options and more export routes.

The objective should therefore be specialisation, connectivity and redundancy all achieved in the right sequence depending on needs and conditions.

The Iran war has given Libya something potentially more valuable than temporarily higher hydrocarbon prices: renewed strategic relevance. But greater strategic relevance does not automatically make the country a more reliable energy partner.

Converting the former into the latter requires a radically different approach not just to the domestic oil and gas industry, but also to overall economic development and regional geopolitics.

Libya must use this moment to pursue strategic redesign: to increase production while recovering wasted gas, improve electricity infrastructure, develop refining and renewables, strengthen regional connections and cooperation, and use competition among international partners to attract investment.

Libya already has the resources and the geography to become an even bigger player in the energy market. The question is whether it can build the rest.

The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.