Image: An oil terminal is seen after it was retaken by rebels
Suhaib Salem  /  Reuters
An oil terminal at Zueitini, 528 miles east of Tripoli, photographed March 27 after it was retaken by rebels from Moammar Gaddafi's forces.
By Kari Huus Reporter
updated 8/24/2011 12:48:06 PM ET 2011-08-24T16:48:06

Let's imagine that post-Gadhafi Libya avoids devolving into chaos. For the new leadership, there's good news and bad news. The good news is black gold. Libya has some of the finest oil in the world to generate revenue. The bad news: The economy is in a shambles and needs to be recreated from scratch.

After four decades under the corrupt and repressive leadership of Moammar Gadhafi, most of the economy is state-run — though poorly run — with little private enterprise to take up the slack. The leadership inherits a damaged infrastructure that was rickety even before the war, and it could take years to ramp up oil production to pre-war levels. To build a healthy, diverse economy will require an overhaul.

“It's going to be a tough economic situation,” says Mohsin Khan, a senior fellow at the Peterson Institute for International Economics. “The new Libyan government will have a choice to make — which way it wants to go. That's critical in determining how it rebounds.”

As it stands, Libya has a highly centralized economy that relies on oil exports for 95 percent of its revenues. About 70 percent of the population relies on government paychecks, many through money-losing state-owned companies.

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Before the conflict, the country was able to produce 1.8 million barrels of sweet light crude oil a day, but billions in oil revenues were diverted into the pockets of the leadership or spent on the military. The country's schools, hospitals, roads, ports, sewer systems and other facilities have badly deteriorated.

“To Libyans, it's shameful that many countries have developed in the last 20 to 30 years, and we are still backward,” says Idris Traina, a longtime opposition leader and president of the Libyan American Association of California. “They didn't spend enough on education or health. For any significant sickness, most (Libyans) go outside the country — to Tunisia, Europe, Jordan or Switzerland.”

Reward, amnesty offered for the killing or capture of Gadhafi

After a young Col. Moammar Gadhafi rose to power in 1969, he imposed his own brand of socialism, one that morphed into a kleptocracy at the top. For many years, Libya was under international sanctions for its role in terrorist activities. Gadhafi began reopening the door to private enterprise only in 2003, when he was trying to revive relations with the world, but the private sector remains marginal.

“Despite modest improvements in the business climate, Libya's bureaucracy remains one of the world's most burdensome,” according to the conservative Heritage Foundation. In the Washington think tank's 2011 ranking of economic freedom around the globe, Libya was 173rd, the lowest in the Middle East and North Africa region.

Story: With Gadhafi out of power, oil prices should fall

So far, the members of the National Transitional Council have largely been consumed by driving out Gadhafi and have given little hint of who or how they hope to manage the economy.

Traina says his contacts in the council are leaning strongly in favor of a free market for Libya that taps into its citizens' latent potential. As it stands, many Libyans are unemployed or underemployed.

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“Usually, people who live under dictatorship for a long time, they lose their creativity. I think if people are given the freedom and the corruption is minimized, I think Libya will be in very good shape,” he says, noting the immense enthusiasm he saw on a recent trip to rebel-held areas. “People are looking forward to working hard and changing the country.”

To move or dismantle Libya's socialist economy is likely to dislocate many people who have been working in Libya's state industries or simply warming chairs in its vast bureaucracy. Libyans talk about diversifying — into tourism or alternative energy, perhaps, but those industries don't yet exist to absorb workers.

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“Gadhafi ran a very complicated patronage system that guaranteed people jobs,” says Khan. “That's why it worries me that the new council, when it takes over, will not want to upset the people (by) taking hard decisions of letting people go from government employment.”

Spending decisions will also be difficult.

Libyans “are concerned about food prices, jobs, subsidies, employment schemes. The new politicians coming in will be promising them that. As a result, spending can be fairly high right away,” says Khan. Unless they can be fiscally conservative, he says, they risk wiping out their existing national wealth.

Because the oil industry has been largely shut down during the fighting, Libya will need to rely initially on an estimated $150 billion in assets that were stashed overseas and have been frozen by the international community, according Khan. The process of unfreezing those funds for Libya's use is just beginning.

Before it runs out, it will be imperative to get the oil industry up and running again, since there's essentially no other source of government revenue.  It could take many months — or years, depending on damage caused by the war — to make necessary repairs, get the oil engineers back in the country and ramp up production.

Restoring Libyan oil output could take years

“It's not as if they can just open the spigots and the money will come flowing in,” says Khan of the Peterson Institute.

Another legacy of the Gadhafi era is the corrosive force of corruption.

Traina, an optimist, believes most Libyans are fundamentally averse to corruption and hopes the new leadership will shun it.

Gamal Khalil, a Libyan-American scientist doing research at the University of Washington, says the problem has spread well beyond Gadhafi's inner circle. He says he's seen it even within his own family in Libya.

“It's becoming so that if you haven't got yourself a piece of the pie here, some people would call you a loser. There's so much money around, and you didn't take advantage of it,” he says. “It's definitely a challenge.”

One thing that everyone seems to agree on is that Libya's new leadership needs to tackle first is restoring basic infrastructure, which sustained $15 billion in damage during the conflict, according to an estimate by Libya's Central Bank.

“It is in really poor shape,” says Khalil, who spent part of his career teaching in Libya. “For that, a lot of well-established companies from the West and China will need to come forward. The money exists — that's the good news.”

There's another reason for optimism about the economy, at least in immediate post-war period.

“The only good news about wars is the economic boom that follows,” says Khan. “Rebuilding infrastructure creates jobs.”

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Explainer: Overview of Libya's oil resources

  • Image: A Libyan oil worker, works at a refinery inside the Brega oil complex
    AP

    OPEC member Libya is the 17th largest producer in the world, third largest producer in Africa and holds the continent's largest crude oil reserves. It normally pumps around 1.6 million bpd, 85 percent of which is exported to Europe and its output is equivalent to about 2 percent of global oil consumption.

  • Libya's place in the oil producing world

    How the country measures up in crude supplies and production.

  • Exports

    Before the war, Libya was a net exporter with domestic consumption estimated at only around 270,000 bpd.

    Europe was most affected by Libyan oil export disruptions. About 28 percent of Libya's oil went to Italy, 10 percent to Germany, 11 percent to China and France and 3 percent to the United States.

    Libyan oil accounted for about 23 percent of Ireland's oil and about 22 percent of Italy's, according to the IEA.

    Around 13 percent went east of the Suez Canal to Asia.

    The shortfall from the loss of Libyan output was covered by alternative sources such as Nigeria and Azerbaijan, which produce similar light crude oils to Libyan oil.

    Saudi Arabia also brought some it its spare capacity online, according to Saudi sources. The kingdom promised to fill any supply gap caused by the unrest in Libya although it produces heavier crude with higher sulfur content than Libya.

  • Infrastructure

    Reuters

    Oil fields
    Most of Libya's oil fields are located in and around the Sirte Basin, in the northeastern part of the country, which contains around 80 percent of the country's proven reserves.

    Other key areas include the Ghadames Basin, about 240 miles south of Tripoli and Cyrenaica Basin in the northeast and the Murzuq oil field in the desert in the south of the country.

    Libya has five domestic refineries with a combined capacity of 378,000 barrels a day:

    Azzawiya Oil Refining Co
    Sarir Refining
    Sirte Oil Co
    Tobruk Refining
    Ras Lanuf Oil & Gas Processing Co

    Ports
    Libya exported various grades of light crude from six major terminals, five of which are located in the eastern part of the country, where protests erupted near the second city of Benghazi.

    Following are the eastern terminals with pre-war loading volumes in January, 2011 provided by the IEA.

    Es Sider 447,000 barrels per day
    Marsa El Brega 51,000 bpd
    Ras Lanuf 195,000 bpd
    Tobruk 51,000 bpd
    Zueitina 214,000 bpd
    Zawiyah 199,000 bpd (January exports)
    Oother unspecified terminals 333,000 bpd

  • Companies

    Image: Libyan oil worker, works at a refinery inside the Brega oil complex
    AP

    Libya's state company
    Under the Gaddafi regime, Libya’s oil industry was run by the state-owned National Oil Corporation (NOC), which was responsible for managing exploration and production sharing agreements with international oil companies. Along with smaller subsidiary companies, the NOC accounted for around 50 percent of the country's oil output.

    Foreign players
    Major oil companies operating in Libya include:

    BP (Great Britain)
    ConocoPhillips (United States)
    Eni (Italy)
    ExxonMobil (United States)
    Hess Corp (United States)
    Marathon (United States)
    Occidental Petroleum (United States)
    OMV (Austria)
    Repsol (Spain)
    Shell (United States)
    Statoil (Norway)
    Wintershall, a unit of BASF (Germany)

Video: Hats off to revolution

Photos: Moammar Gadhafi

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  1. Col. Moammar Gadhafi is seen in Tripoli on Sept. 27, 1969, after leading a military coup that toppled King Idris. Gadhafi has maintained his rule over Libya for more than four decades since the coup. Gadhafi was killed in Sirte on Oct. 20 as revolutionary forces took the last bastion of his supporters. (AFP - Getty Images) Back to slideshow navigation
  2. Gadhafi, left, and Egyptian President Gamal Abdul Nasser, right, arrive in Rabat, Morocco, in December 1969 for the Arab Summit Conference. (Benghabit / AFP - Getty Images) Back to slideshow navigation
  3. Col. Gadhafi, left, jokes with a group of British hippies in Tripoli in July 1973. (AFP - Getty Images) Back to slideshow navigation
  4. Gadhafi was purportedly a major financier of the Black September movement, a band of Palestinian militants. Its members perpetrated the massacre of Israeli athletes at the 1972 Summer Olympics in Munich. One of the Black September guerrillas who broke into the Olympic Village is seen in this picture. (Keystone via Getty Images) Back to slideshow navigation
  5. Gadhafi during the summit of the Organization of African Unity on Aug. 4, 1975, in Kampala, Uganda. (AFP - Getty Images) Back to slideshow navigation
  6. Flowers are laid at the memorial to Yvonne Fletcher, a British police constable who was shot dead by terrorists in April 1984 while on duty during a protest outside the Libyan embassy in London. Fletcher's death led to an 11-day police siege of the embassy and a breakdown of diplomatic relations between Libya and the United Kingdom. (Fox Photos via Getty Images) Back to slideshow navigation
  7. Gadhafi and his second wife Safiya wave to the crowd upon their arrival in Dakar, Senegal, for a three-day official visit on Dec. 3, 1985. Gadhafi has eight biological children, six by Safiya. (Joel Robine / AFP - Getty Images) Back to slideshow navigation
  8. U.S. Ambassador to West Germany Richard Burt, fourth from left, and West Berlin Mayor Eberhard Diepgen, fifth from left, inspect the damage following an April 5, 1986, bombing at a Berlin discotheque frequented by American serveicemen. Libya was blamed for the blast, which killed three and injured more than 200. Then-U.S. President Ronald Reagan retaliated by ordering airstrikes against the Libyan capital of Tripoli and city of Benghazi. (Wolfgang Mrotzkowski / AFP - Getty Images) Back to slideshow navigation
  9. French policemen and army soldiers unload crates of arms and ammunition seized aboard the Panamian merchant ship Eksund on Nov. 3, 1987 at Brest military port in France. A huge supply of arms and explosives purportedly supplied by Libya and destined for the Irish Republican Army was found aboard the vessel. (Andre Durand / AFP - Getty Images) Back to slideshow navigation
  10. This Dec. 22, 1988, photo shows the wreckage of the Pan Am airliner that exploded and crashed over Lockerbie, Scotland, killing 270 people - most of them Americans. Gadhafi has accepted Libya's responsibility for the bombing and paid compensation to the victims' families. Libya's ex-justice minister was recently quoted as telling a Swedish newspaper that Gadhafi personally ordered the bombing. (Letkey / AFP - Getty Images) Back to slideshow navigation
  11. Tunisian President Zine El Abidine Ben Ali, right, welcomes Gadhafi upon his arrival at Tunis airport on Jan. 10, 1990. (Frederic Neema / Reuters) Back to slideshow navigation
  12. Lockerbie bomber Abdel Baset al-Megrahi is escorted by security officers in Tripoli on Feb. 18, 1992. Al-Megrahi was granted a compassionate release from a Scottish prison in August 2009 on the grounds that he was suffering from prostate cancer and would die soon. (Manoocher Deghati / AFP - Getty Images) Back to slideshow navigation
  13. Egyptian President Hosni Mubarak, left, accompanies Gadhafi on a tour at the pyramids of Giza on Jan. 19, 1993. (Aladin Abdel Naby / Reuters) Back to slideshow navigation
  14. An Egyptian border policeman counts passports belonging to Palestinians waiting at the post in Salloum for transit to the Gaza Strip on Sept. 12, 1995. Families were stranded at the border with Libya after Gadhafi decided to expel 30.000 Palestinians, reportedly in order to call attention to the political situation in the Gaza Strip and West Bank. (Amr Nabil / AFP - Getty Images) Back to slideshow navigation
  15. Libyan women bodyguards provide security for VIPs during a military parade in Green Square on Sept. 1, 2003, to mark the 34th anniversary of Gadhafi's acension to power. (Mike Nelson / EPA) Back to slideshow navigation
  16. Family members of people killed in the bombing of Pan Am 103 over Lockerbie, Scotland, read documents on Sept. 12, 2003, as the U.N. Security Council votes to lift sanctions against Libya for the 1988 bombing. (Spencer Platt / Getty Images) Back to slideshow navigation
  17. British Prime Minister Tony Blair, left, flew to Libya in 2004 to hold talks with Gadhafi inside a Bedouin tent. Here, Blair and and Gadhafi stroll to a separate tent in Tripoli for lunch during a break in their talks. Blair's role was particularly vital in Gadhafi's international rehabilitation. He praised the leader for ending Libya's nuclear and chemical weapons program and stressed the need for new security alliances in the wake of the Sept. 11 terror attacks. (Stefan Rousseau / AP) Back to slideshow navigation
  18. U.S. President George W. Bush looks at material and equipment surrendered by Libya, during a tour of the Oak Ridge National Laboratory in Tennessee on July 12, 2004. Bush officially lifted the U.S. trade embargo against Libya on Sept. 20, 2004. (Tim Sloan / AFP - Getty Images) Back to slideshow navigation
  19. View of the remains of Gadhafi's bombed-out headquarters, now turned into a living memento, inside his compound in Tripoli on Oct. 15, 2004. The sculpture in the center represents a golden fist grabbing a U.S. jet fighter. U.S. jets bombed Tripoli, killing Gadhafi's adopted 4-year-old daughter, in April 1986 in retaliation for the Berlin discotheque bombing. (John Macdougall / AFP/Getty Images) Back to slideshow navigation
  20. French President Nicolas Sarkozy is welcomed by Gadhafi in Tripoli on July 25, 2007. Sarkozy arrived for a meeting with the Libyan leader a day after the release of six foreign medics from a Libyan prison. (Patrick Kovarik / AFP - Getty Images) Back to slideshow navigation
  21. Gadhafi's son Saif, center, attends a ceremony in the southern Libyan city of Ghiryan on Aug. 18, 2007, to mark the arrival of water from the Great Manmade River, a project to pipe water from desert wells to coastal communities. (Mahmud Turkia / AFP - Getty Images) Back to slideshow navigation
  22. Gadhafi looks at a Russian-language edition of his book "The Green Book" during a meeting with Russian President Vladimir Putin on April 17, 2008, in Tripoli. Putin was in Libya for a two-day visit to rebuild Russian-Libyan relations. (Artyom Korotayev / Epsilon via Getty Images) Back to slideshow navigation
  23. Gadhafi and Italian Prime Minister Silvio Berlusconi pose for a picture after signing an agreement in the eastern city of Benghazi on Libya's Mediterranean coast on Aug. 30, 2008. Berlusconi apologized to Libya for damage inflicted by Italy during the colonial era and signed a $5 billion investment deal by way of compensation. (Mahmud Turkia / AFP - Getty Images) Back to slideshow navigation
  24. Gadhafi poses with U.S. Secretary of State Condoleezza Rice prior to a meeting in Tripoli on Sept. 5, 2008. Rice arrived in Libya on the first such visit in more than half a century, marking a new chapter in Washington's reconciliation with the former enemy state. (Mahmud Turkia / AFP - Getty Images) Back to slideshow navigation
  25. Gadhafi attends the closing session of the Arab League summit in Doha, Qatar, on March 30, 2009. (Marwan Naamani / AFP - Getty Images) Back to slideshow navigation
  26. Gadhafi waves after delivering a speech during a meeting with 700 women from the business, political and cultural spheres on June 12, 2009, in Rome. The Libyan strongman drew cheers and jeers when he criticized Islam's treatment of women but then suggested it should be up to male relatives to decide if a woman can drive. (Christophe Simon / AFP/Getty Images) Back to slideshow navigation
  27. U.S .President Barack Obama shakes hands with Gadhafi during the G-8 summit in L'Aquila, Italy, on July 9, 2009. (Michael Gottschalk / AFP - Getty Images) Back to slideshow navigation
  28. Libyan Abdel Baset al-Megrahi, who was found guilty of the 1988 Lockerbie bombing, top left, is accompanied by Seif al-Islam el-Gadhafi, son of the Libyan leader, upon his arrival at the airport in Tripoli on Aug. 20, 2009. Scotland freed the terminally ill Lockerbie bomber on compassionate grounds, allowing him to die at home in Libya despite American protests that he should be shown no mercy. (Amr Nabil / AP) Back to slideshow navigation
  29. The president of the U.N. General Assembly, Ali Abdussalam Treki, top center, listens in apparent misery as Gadhafi speaks on Sept. 23, 2009, at U.N. headquarters in New York. It was Gadhafi's first appearance before the U.N., and he emptied out much of the chamber with an exhaustive 95-minute speech in which he criticized the decision-making structure of the world body and called for investigations of all the wars and assassinations that have taken place since the U.N.'s founding. (Stan Honda / AFP/Getty Images) Back to slideshow navigation
  30. Gadhafi greets Venezuelan President Hugo Chavez during the plenary session at the Africa-South America Summit on Margarita Island on Sept. 27, 2009. Chavez and Gadhafi urged African and South American leaders to strive for a new world order countering Western economic dominance. (Carlos Garcia Rawlins / Reuters) Back to slideshow navigation
  31. Tunisian President Zine El Abidine Ben Ali, Yemeni President Ali Abdullah Saleh, Gadhafi and Egyptian President Hosni Mubarak during a group picture of Arab and African leaders ahead of the opening of the second Arab-African summit in the coastal town of Sirte, Libya, on Oct. 10, 2010. Ben Ali and Mubarak were driven out of power by popular revolts in 2011. (Sabri Elmehedwi / EPA) Back to slideshow navigation
  32. Gadhafi is followed by members of the press in Tripoli before making a speech hoping to defuse tensions on March 2. Gadhafi blamed al-Qaida for creating turmoil and told applauding supporters there was a conspiracy to control Libya and its oil. (Ahmed Jadallah / Reuters) Back to slideshow navigation
  33. Libyan rebels step on a picture of Gadhafi at a checkpoint in Tripoli's Qarqarsh district on Aug. 22. Libyan government tanks and snipers put up a scattered, last-ditch effort in Tripoli on Monday after rebels swept into the heart of the capital, cheered on by crowds hailing the end of Gadhafi's 42 years in power. (Bob Strong / Reuters) Back to slideshow navigation
  34. A man in Tripoli holds a photo said to be of Moammar Gadhafi after the announcement of the former leader's death, Oct. 20, 2011. Gadhafi was killed when revolutionary forces overwhelmed his hometown, Sirte, the last major bastion of resistance two months after the regime fell. (Abdel Magid Al-fergany / AP) Back to slideshow navigation
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  1. Image: TO GO WITH AFP PACKAGE ON THE 40TH ANNIV
    AFP - Getty Images
    Above: Slideshow (34) Moammar Gadhafi through the years
  2. Image: A photo said to show people gathering during recent days' unrest in Benghazi, Libya. The content, date and location of the image could not be independently verified.
    AP
    Slideshow (81) Conflict in Libya
  3. Daryl Cagle / MSNBC.com, Politicalcartoons.com
    Slideshow (5) Daryl Cagle takes on Gadhafi

Interactive: Libya uprising: The latest

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