SPEAKING
FREELY Iraq's oil: A neo-con dream gone
bust By Peter Kiernan
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
Crude-oil prices hit
a record US$75 per barrel in late April, a level
nearly three times the prices seen just prior to
the US-led invasion of Iraq in March 2003.
Although oil prices have slipped a few dollars
since then, the bullish price environment is not
something the Bush administration banked on when
it launched the military campaign to oust Saddam
Hussein from power three years ago.
Indeed, there was an expectation that
after Saddam's ouster Iraq would pump more oil,
not just so it could finance its own
reconstruction, but also to keep oil prices stable
and preferably lower. A US-friendly post-Saddam
Iraq realizing its potential as a
major oil producer would,
it was also hoped, strengthen US leverage in the
Middle East. But the story of Iraq's oil over
the
past three years
has not been quite what was expected by the
administration of President George W Bush and
neo-conservative advocates for Saddam Hussein's
removal.
The Bush administration hardly
mentioned oil in the run-up to the invasion of
Iraq, obviously wary of the claim that the case
for ousting Saddam was motivated by the desire to
gain access to Iraq's oilfields for US oil
companies. In fact the US oil lobby was not behind
the push for regime change in Baghdad, but oil in
the geostrategic sense was factored in by the Bush
administration in the decision to invade.
Saddam's rule over a state that possessed
115 billion barrels of oil (the third-largest
reserves in the world) had been seen as a threat
to US strategic interests in the oil-rich Persian
Gulf region since the Iraqi invasion of Kuwait in
1990. Although the United States is less dependent
on Persian Gulf oil than Europe, Japan, and now
China, securing the flow of oil from allied
petro-states to US and global markets defines US
interests in that region. Iraq's invasion of
Kuwait threatened this strategic arrangement
between the US on the one hand and Saudi Arabia
and the smaller Arab Gulf states on the other.
While former presidents George H W Bush
and Bill Clinton preferred to contain a weakened
Iraq throughout the 1990s, the push from
neo-conservatives throughout that decade to remove
Saddam from power found resonance with President
George W Bush. A speech by Vice President Richard
Cheney in August 2002 explained the Bush
administration's view of Saddam Hussein's threat
to the strategic balance in the Middle East.
He stated that, "armed with an arsenal of
[weapons of mass destruction], and seated atop 10%
of the world's oil reserves, Saddam Hussein could
then be expected to seek domination of the entire
Middle East, take control of a great portion of
the world's energy supplies, [and] directly
threaten America's friends throughout the region".
In Saddam's place, ostensibly, would be
the formation of an Iraqi government friendly to
the US and the West that would first maintain a
higher and more reliable flow of oil and, second,
pursue policies conducive to US and other Western
interests in the Middle East, a crucial region
with nearly two-thirds of the world's oil
reserves.
Oil as a geostrategic factor
also figured in the neo-conservative mission to
unseat Saddam as the first step of politically
transforming the Middle East. Removal of his
regime was seen as crucial to undermining the
other established oil powers in the region, Saudi
Arabia and Iran. These states are, respectively,
the largest and second-largest oil producers in
the Organization of Petroleum Exporting Countries
(OPEC), a group dominated by Middle East oil
exporters.
A US-friendly Iraq that
abandoned OPEC and pumped more oil would, some
neo-conservatives argued, weaken Saudi Arabia and
Iran and break the grip of OPEC on the global oil
market. In this way, so the theory went, the
petrodollars that strengthen the grip on power of
the House of Saud and Iran's mullahs and fund
terrorist networks in the Middle East would dry
up. The mission to remake the Middle East could be
done by flooding the market with Iraqi oil.
The oil factor in the plan for a regional
transformation in the Middle East was pushed by
some conservative journals and think-tanks in the
run-up to the Iraq invasion. The National Review,
for example, wrote in January 2002, "There are two
principal sources of power for Middle Eastern
states and terrorist groups hostile to the West:
weapons of mass destruction and oil. Therefore,
the war on terrorism should also seek to diminish
the influence of - and perhaps destroy - OPEC." In
November that year the National Review also
claimed, "Iraqis could withdraw from OPEC [after
Saddam's ouster] and begin fully pumping oil into
the world market, thus reducing Saudi market power
and one of the incentives for the US to appease
the [Saudi] regime."
In March 2003 the
Washington, DC-based Heritage Foundation released
a paper on Iraq's oil that recommended
privatization of its oil industry and Iraq's
departure from OPEC. It wrote, "Iraq's
restructuring and privatization of its oil-and-gas
sector could become a model for oil-industry
privatizations in other OPEC states as well,
weakening the cartel's influence over global
energy markets ... and depending on the dynamics
of global economic growth and world oil output,
Iraq's increase in oil-production capacity could
bring lower oil prices in the long term." The
report also claimed, "An Iraq outside of OPEC
would find available from its oil trade an ample
cash flow for the country's rehabilitation."
Not everyone shared in this enthusiasm.
Prior to the Iraq invasion, the Council on Foreign
Relations and the James A Baker Institute at Rice
University released a joint paper that cautioned
against rosy scenarios about the ability of Iraq's
petroleum to influence oil markets quickly, as
well as of the receptiveness of Iraqis toward
outsiders trying to influence decision-making on
the big-picture issues (such as privatization and
OPEC membership).
It commented, "There has
been a great deal of wishful thinking about Iraqi
oil." The report cautioned against expectations of
an Iraqi oil bonanza with the assessment that
"Iraq's oil industry is in desperate need of
repair and investment" after more than two decades
of wars and sanctions. It also warned that the
pace of recovery in Iraq's oil sector would depend
on the post-invasion political and security
environment.
Those who had a cautious
assessment about the prospects for Iraq's oil were
prescient. Not long after Saddam's regime fell in
April 2003, Iraq's oil industry, already
deteriorating from under-investment for more than
20 years, suffered from widespread looting of its
infrastructure. Meanwhile oil production
temporarily ground to a halt in the chaos as the
apparatus of the Iraqi state collapsed. By
mid-2003, Iraqi insurgents began to target the oil
infrastructure - especially by attacking pipelines
- in sabotage attacks that have been ongoing for
the past three years.
According to the
Institute for the Analysis of Global Security,
there have been at least 309 reported attacks on
Iraq's oil pipelines, installations, and
oil-security personnel. In particular the export
pipeline that links the large northern oilfield of
Kirkuk to the Turkish Mediterranean port of Ceyhan
- which normally transits about 40% of Iraq's oil
exports - is frequently sabotaged and is currently
not operating.
Insurgent attacks have been
the main factor in poor output levels for both oil
production and exports, while the state of Iraq's
worn-out oil infrastructure, corruption and poor
power output have exacerbated the situation.
Despite Cheney's claiming in April 2003 that Iraq
could increase oil production to 3 million barrels
per day (mbpd) by the end of that year, Iraq's oil
output is still lower than prewar levels.
According to Energy Intelligence, Iraq's oil
production is at 1.8mbpd, compared with 2.5mbpd
just over three years ago, while oil exports are
down to 1.4mbpd compared with about 2mbpd just
over three years ago.
Because of much
higher global oil prices, Iraq's annual oil
revenue is greater now than three years ago, and
this has more than compensated for the decline in
oil exports. Nevertheless, the Bush
administration's hopes that Iraq's oil revenue
would pay for its hefty reconstruction bill were
dashed. In March 2003, then deputy secretary of
defense Paul Wolfowitz stated that, with Iraq, "We
are dealing with a country that can really finance
its own reconstruction, and relatively soon."
But in September that year the White House
asked Congress to approve $18 billion in
US-financed reconstruction funds for Iraq. That
Iraq faced a huge reconstruction bill was no
mystery. A 2002 study by a Yale University
economist put reconstruction costs at between $30
billion and $105 billion, while an October 2003
World Bank/UN Development Program estimate put the
cost at $55 billion. Even with prices at $70 a
barrel, Iraq still needs donor financing for
reconstruction.
Facing declining
production, huge reconstruction costs, and
frequent sabotage attacks, Iraq's oil sector has
not been able to alter the Middle East political
landscape as neo-conservatives had hoped. In fact
the opposite has occurred. Rather than post-Saddam
Iraq being able to flood the market with oil to
depress prices, its instability has instead been a
contributing factor to the steady rise in the
price of oil.
At the time of the invasion
in March 2003 oil prices were hovering around the
$25-$30 level, but they have since risen to reach
a peak of $75 per barrel late last month. Market
sensitivity about crises in several oil-producing
states, including Iraq, have become more acute in
a time of robust global oil-demand growth and
tight OPEC spare capacity, which has driven prices
higher than what market fundamentals would
suggest.
Furthermore, high oil prices
translate to high revenue for the other major oil
exporters, including Saudi Arabia and Iran. These
two states are earning vastly increased oil
revenue compared with 2003. According to the US
Department of Energy, Saudi Arabia will rake in
$163 billion in oil revenue this year compared
with $85 billion in 2003, while Iran will reap $50
billion in 2006 compared with $24 billion three
years ago.
But high oil prices have
provided more than just a financial cushion to
these key petroleum exporters. They can also
exercise greater geopolitical strength. In the
current bullish oil-price environment, Saudi
Arabia remains invaluable to US interests as a key
oil supplier and doesn't fear this role being
diminished by a resurgent Iraq. And Iran feels it
can engage in more assertive diplomacy over its
nuclear program with less risk of sanctions on its
energy exports.
Iraq has had more urgent
issues to worry about than reconsidering its
membership of OPEC, and there has been no move by
Iraqi officials to withdraw from the oil
exporters' group. In fact, Iraq is some years away
from even reaching its official OPEC quota of
3.5mbpd. Meanwhile, hopes that post-Saddam Iraq
would in the short term open its oilfields to
foreign investment were also unfulfilled. A
combination of the poor security environment and
policy uncertainty has postponed strategic
decision-making on foreign investment in Iraq's
oil, decisions that will only be made after a
permanent government is formed and Iraq's
legislature devises a petroleum law.
For
the Bush administration, the ousting of Saddam
Hussein removed a potential threat in the vital
Persian Gulf region, but the subsequent
instability in Iraq has severely constricted its
ability to exercise leverage in the region. For
example, Iran is not worried about the substantial
US military presence in Iraq as long as US forces
are preoccupied with battling a persistent
insurgency. And Persian Gulf oil supplies remain
vulnerable; not from an Iraq as a hostile state
actor, but from Iraq's internecine violence with
its regional implications.
Meanwhile,
neo-conservative expectations that post-Saddam
Iraq's oil could be used as a weapon to lower oil
prices, undermine Saudi Arabia and Iran, and bust
the OPEC cartel wide open have not been realized.
Iraq's deteriorated security environment has
played on oil-market fears that have contributed
to higher oil prices. Iraq is producing less oil
than it did before the invasion, leaving the
market share of the region's two big oil powers,
Saudi Arabia and Iran, unchallenged. And both
those states are also enjoying near-record-level
revenues. The grand dream of an Iraqi oil boom
fueling transformation in the Middle East has gone
bust.
Peter Kiernan is an
associate covering energy and Middle East issues
at AALC, a business consulting firm in the
Washington, DC, metropolitan area.
(Copyright 2006 Peter Kiernan.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
