If say Italy had discovered large amounts of oil in Libya in the 1920s (very hard I know) and started to develop it in the 1930s would the Allies have allowed Italy to become alienated and fall in line with Hitler? Being a strategically important source of oil, or at least future source, would the Allies have worked harder to keep them neutral or just conducted OTL policy and seized the oil fields at first chance when Italy jumps in?
The British-French break with Italy was over Abyssinia. Italy's brutal war of aggression was offensive. The British and French governments denounced it, but were not prepared to do anything concrete to stop it - in part because they wanted Italy as a counterweight to Germany over Austria. Mussolini was initially opposed to German ambitions in Austria, and was deeply offended by the assassination of Chancellor Dollfuss by Austrian Nazis.
But the Abyssinian question clearly showed that Italy could not rely on the friendship of France and Britain, while Germany eventually endorsed Italy's invasion. After Hitler assured Mussolini that he had no ambitions regarding the South Tyrol, there was no real obstacle to the formation of the Axis, and little Britain and France could do about it.
I don't think that access to Libyan oil would be a big factor. Oil was fairly cheap in that era, and Britain and France had access to effectively unlimited supplies of oil from the Middle East and the Americas.
Hitler OTOH would be
very eager to partner with a reliable oil supplier.
Italy would probably have remained neutral for the first year of the war as in OTL; it would have been a major supplier of oil to Germany alongside the USSR, though Germany's ability to pay for imports was badly strained.
The Allies would try to pressure Italy to cut off oil supplies, but they could not push too hard, and not hard enough to have any effect IMO.
When France falls and Italy enters the war (as OTL, which seems likely), then things get interesting. LIbya becomes an obvious target for Britain, but at this period of the war Britain has no hope of attacking Libya. British submarines will be concentrated to attack Axis shipping in the Med, especially tankers. (One presumes that Italy will acquire a lot more tankers as the oil fields come on-line.)
Will Hitler send German troops to Libya as well? That is, before the Italians get bashed at the end of 1940? OT1H, Libya is already important to Germany; OTOH, the Italian forces there should have been more than enough to keep the British away.
Even if Germany does not send troops to Libya immediately, it seems likely that they would send airpower to help suppress Malta and secure the sea lanes. OTL that was important only to send stuff to Africa to help the Italians, not a German priority. ATL, it's important to secure Germany's oil supply, which will be a
high German priority. Germany may even propose a joint airborne attack on Malta, probably in place of the Italian invasion of Egypt. And I don't think Malta could withstand such an attack in 1940.
After that, it's quite possible that there is a joint German-Italian invasion of Egypt, to further secure the sea lanes and pre-empt any British attack. This will not get
major German participation, but the Germans will be interested and send something.
This may have the odd knock-on of pre-empting the Italian invasion of Greece. OTL, Mussolini decided on it partly on impulse and because nothing else was going on in the theater that he could brag on. ATL, there's other stuff, and Germany is going to be paying a lot more attention.
