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    Middle East
     May 17, 2006
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 here if 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 here if you are interested in contributing.

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