Thursday, March 06, 2003

A good analysis of how oil fits into current US policy on Iraq.

It is a common mistake to underestimate the importance of ideology, or political values, in US foreign policy
Antiwar demonstrators in the US and Europe wave "No blood for oil" placards. But oil is only a background factor in the conflict. It is true, of course, that if Saddam Hussein were not sitting on 11% of the world's oil reserves and within striking distance of much of the rest, there would be less western concern about him. Questions of long-term supply and price are of vital interest to the western world, but it does not follow that the war is being fought on behalf of "big oil". Notwithstanding the personal connections of senior US politicians to the oil sector, it is oil consumers, not oil producers, that matter. And even they are just one factor in the Iraq conflict.

The Middle East is now more important than ever to the US because it exports terrorism as well as oil. And the US administration's main motive is roughly what it says: to pre-empt the possibility of weapons of mass destruction being used by a man with a proven record of hostility to the US.

Despite having two former oilmen in the White House the president and vice-president US oil companies have failed to get the administration to relax the ban on their investing in Libya and Iran. The oil lobby proved no match for the proIsrael groups that got US sanctions on Libya and Iran retained. Those sanctions prevent US companies from buying Libyan or Iranian oil.

There is no doubt that Saddam would use oil as a political weapon if he could. He tries to do so even in his weakened state. Last April, for example, he stopped all Iraqi exports in protest against Israel's actions in the occupied territories albeit with minimal effect on the oil price.

From the oil industry perspective, the worst scenario would be a strike by Iraq on Ras Tanura, the main Saudi oil-loading port. A more plausible scenario is that, if facing defeat by the US, Saddam might destroy his own oil wells. His army set fire to about 700 wells during its 1991 retreat from Kuwait. To guard against this happening in Iraq, the Pentagon has been planning to take rapid control of Iraq's 1500 oil wells in the event of war.

Assuming that Iraq's oil fields are not destroyed, what will the US want to do with the Iraqi oil industry, if and when it gets hold of it? Colin Powell says: "It will be held in trust for the Iraqi people, to benefit the Iraqi people. That is a legal obligation that the occupying power will have."

Grabbing Iraq's oil for itself would be counterproductive for the US. It would probably raise the oil price and therefore the cost of all other US oil imports. Iraqi production is now about 2,5-million barrels a day, less than a third of the 9-million barrels the US imports daily.

But the US would want to see Iraqi output increased, as would any postSaddam regime in Baghdad. And there is no doubt it can be increased.

Would a pro-US Iraqi government or a US military governor go as far as handing all foreign oil contracts to US companies? It is hard to imagine Washington getting away with such favouritism even if it has fought a war largely on its own. For one thing, it would be difficult to decide whom to favour. BP, for instance, is now the largest oil and gas producer in the US, and its CE, John Browne, has made clear his company should be included in any distribution of Iraqi spoils. For another, it could cause a row with Russia. The Russian government has a major stake in preserving a commercial relationship with Iraq. Iraq still owes Russia an estimated $8bn from the Soviet era, which may be most easily recoverable in the form of oil.

One option being discussed by some people around the Bush administration is privatisation of the Iraqi oil industry. This would go beyond granting foreign oil companies licences to develop new fields and would include selling shares in the state Iraqi National Oil Company, which now pumps all of Iraq's oil. One supporter of this is Fadhil Chalabi, a former Iraqi oil ministry official, now based in London. "Partial privatisation would promote efficiency. But it would be hard to sell politically, because Iraqis feel very nationalist about their oil," he says.

Privatisation, however, could indirectly serve the US goal of weakening Opec. It is most unlikely that even a pro-US puppet regime in Baghdad would take Iraq out of Opec; such a move would be very hard to sell to its own citizens and neighbours. But the more Opec governments invite foreign oil companies in, the more the latter push the former to bust their production quotas. This is happening in three Opec members Nigeria, Algeria and Venezuela (before the current strike) which are all trying to persuade the rest of the cartel that they must have higher relative quotas.

Creating such pressures inside Iraq, through privatisation, might modestly increase world oil supplies and bring down the oil price.

"It might lessen US dependence on Saudi Arabia. And if it were to bring the oil price (now around $30 a barrel) into the teens, then this might force Arab oil-producing governments to open up politically and economically," says Alkadiri.

Underlining, again, that the US game is as much political as it is commercial.

< email | 3/06/2003 02:03:00 PM | link