Politics of oil
American seizure of Iraqi oil following a war against Iraq would spell disaster for all Arab economies, bringing back memories of the colonial-era pillage, writes Ahmed El-Sayed El-Naggar*
Lawrence Lindsey, former advisor to the US president on economic affairs, resigned last December shortly after he had declared that oil was Washington's primary objective in pushing for an attack on Iraq. Perhaps he was pushed to resign on account of his frankness, unaccustomed among senior US officials, regarding Washington's true reasons for going to war. Certainly, Lindsey's assertion jars with Washington's officially declared objectives, such as disarming Iraq and overturning the current regime to pave the way for a democratic system of government, which the US administration is well placed to know are false.
Iraq possesses enormous oil reserves, estimated at more than 112 billion barrels, or approximately 11 per cent of known global reserves. But the US believes that there may be much more oil than that. In 1987, former US Secretary of Energy John Harrington announced that Iraq was floating on a sea of oil and that its reserves may be greater than those of Saudi Arabia, which account for a quarter of the world's known reserves.
If the US gained control of Iraq through invasion and the installation of a puppet regime in Baghdad it would effectively have its hands on global oil production. Simply by raising the volume of Iraqi production it could cause world oil prices to plummet -- a distinct advantage to the largest oil consumer and importer in the world. Little would it matter that this would wreak havoc on the economies of oil-exporting nations, especially those countries, such as the Gulf states, that are almost completely dependent on oil for their national incomes and for ensuring high standards of living for their citizens.
US officials have often said that the appropriate price for a barrel of oil is between $15 and $18. Occupation of Iraq, or the installation of a proxy government there, would enable the US to bring the oil price down to this level, or even to a level slightly above the highest cost of extracting it, which is just over $10 per barrel. Having done this, the US could then begin accumulating an enormous oil reserve, far in excess of its current notion of a strategic reserve of 600 million barrels, to be used in times of crisis and capable of meeting US consumption needs for years to come.
A few figures will explain how vital oil is to the US. Current US reserves stand at approximately 21 billion barrels, while US net consumption is 17 million barrels per day. Were the US to rely entirely on its own oil, it would deplete its reserves in only three and a half years. Instead, it imports, and in vast quantities. In 2001, its net imports of oil came to 10.8 million barrels a day, while domestic production averaged at 6 million barrels per day, according to the Monthly Energy Review published by the Energy Information Administration in Washington.
Even if it sustained that level of production, the US would deplete its reserves in less than 10 years, rendering it totally dependent on oil from abroad. At present, a $1 rise in the cost of a barrel of oil would raise America's payments on oil imports by $4 billion a year. Assuming its rates of consumption remain constant, once its reserves were depleted, a $1 rise in the price of a barrel of oil would add a hefty $6 billion to the US net import bill.
Meanwhile, the UK and Norway will become totally dependent on imports to meet their oil needs before the current decade is up. Two decades from now, China and Russia will have depleted their reserves and become the world's two largest oil importers. The reserves of Libya and Mexico will run out before the end of the fourth decade of this century, assuming they maintain their current level of production.
Only a handful of countries will continue to hold significant oil reserves and a large export capacity seven decades from now: the Gulf countries, Iraq, Iran and Venezuela. Thus, if the US wants to keep oil prices as low as possible for as long as possible, it will be in its interests to use its enormous military might to put pressure on the major oil-exporting nations in the Gulf and to establish a military presence in, or occupy, a major oil-producing nation -- Iraq -- in order to generate a surplus in production and a consequent collapse in prices.
Should the US succeed in this strategy, it will bring a sudden end to the "Saudi epoch" in the international oil market as it will usher in Iraq as the world's major producer and source of oil. The results would be cataclysmic for the economies of Saudi Arabia and the Gulf countries, as well as for Iran, Russia, Mexico, Venezuela and all other oil-exporting nations. Although the US might compensate Mexico, its partner in the North American Free Trade Zone, for these economic repercussions, it will certainly have avenged itself on all the other oil exporters.
If a $1 dollar reduction in the price of oil reduces US oil import payments by $4 billion a year, a $12 reduction from its current level of $30 per barrel would save it $48 billion a year and a $15 reduction would save it $60 billion per year. Within two years, the US will have paid itself back and more for the total cost of a war on Iraq, which some estimates have placed at roughly $100 billion. The surplus profit could then be distributed among the largest oil consumers in the US military-industrial complex, notably the aviation and transport companies, then the army, and then among ordinary consumers.
On the other side of the equation, to Arab oil-exporting nations a $1 decrease in the price of a barrel of oil nets them an annual loss of more than $6 billion on their oil exports. Saudi Arabia's annual revenues alone would plummet by $2.5 billion to $3 billion. Imagine, then, the devastating effects that a price cut from $30 to $15 per barrel would have: a loss in revenues for Arab oil- exporting nations as a whole to the tune of $90 billion and for Saudi Arabia alone to $40 billion per year.
These are only the direct losses and do not take into account the spin-off effects on other countries. Among the austerity measures these countries would have to take would be to lay off large numbers of Arab and foreign workers, which would rock the labour markets in their native countries upon their return home. In addition, the drop in per capita income in the Gulf countries would cause a commensurate drop in Arab tourism in other Arab countries and in other parts of the world.
The rise in oil prices following the October 1973 War was one of the major factors contributing to the decline in US economic indicators over the course of the decade that followed. According to US figures, the US balance of trade in non-petroleum related goods produced an average annual surplus of $28 billion between 1974 and 1982, while it registered a deficit of an average of $46.5 million in oil and petroleum related products during the same period, yielding a total annual deficit in the balance of trade of $19.3 billion.
Clearly, the end of the era of cheap oil following the taking control by petroleum exporting nations of their own oil was heavily instrumental in the rapid decline of the international status of the US economy from 1974 until the mid-1990s. Similarly, the major price hikes in oil following the Iranian Revolution in 1979 and the outbreak of the Iraq-Iran War in 1980 contributed to the stagnation of the economies of the industrialised nations in 1981 and 1987. Conversely, when oil prices collapsed in the winter of 1986, oil-exporting nations, and Arab oil-exporting nations in particular, suffered severe stagnation and financial crisis.
On all the major issues concerning the oil market, from raising prices to equitable levels and improving the conditions for production quotas to the nationalisation of oil supplies, Iraq had always been among the hawks in OPEC. As a matter of historical record, therefore, Iraq has always presented an obstacle to the US's oil-market strategy. This explains why the US administration's behaviour towards that country is so implacably vindictive, and why, in the process of occupying Iraq to drive oil prices down to the cheapest possible levels, it wants to drive a lesson home to all nations opposed to the US and use the fate of Iraq as an example to intimidate all developing nations.
However, the will of the US administration is not the only factor that will determine the fate of this region. The Arab people, whose oil is targeted, can and must act to stop this encroachment on their economic futures and the attempt to revive one of the most flagrant forms of colonialist-era pillage. Arab nations in general, and the Arab oil-exporting nations in particular, can and must act to prevent American aggression against Iraq. By allowing it to go ahead they will have forfeited control over revenues from their petroleum wealth, precipitating a drastic decline in the standards of living of their people and, consequently, political tensions and unrest.
The interests of the major European powers and Russia and Japan also dictate action to prevent American occupation of Iraq. Indeed, to appease Washington on Iraq would be to help unleash an American drive to global hegemony, reminiscent of that attempted by the fascist regimes that threatened global peace and security 60 years ago.
* The writer is an economic affairs expert at the Al-Ahram Centre for Political and Strategic Studies.
