Bracing for the shock
An "oil shock" seems inevitable after war, Michael Jansen reports
Plans to wage war, overthrow the Baghdad government and install a US military governor reveal that the primary objective of President George W Bush's administration is dominion over the Middle East.
"Control of Iraq's oil is a byproduct of this drive," Walid Khadduri, editor-in-chief of the authoritative oil weekly Middle East Economic Survey (MEES), told Al-Ahram Weekly.
Once in charge, Washington is expected to give preferential treatment to US companies, which have been excluded from Iraq's oil sector since nationalisation in 1972 and, according to administration hawks, privatise it.
The fact that the Bush administration's overall war aim is geopolitical power, rather than securing control of Iraq's oil, as some analysts argue, reveals why the administration is prepared for two serious negative consequences of waging this war.
The first is an "oil shock" of far greater magnitude than that of 1973 when Saudi Arabia shut off exports to punish the West for supporting Israel in the October War. A foreign oil expert based in Baghdad predicted that an "oil shock" is highly probable. The situation is precarious because of a high level of instability in oil producing countries other than Iraq -- notably Venezuela and Nigeria -- which could produce a serious shortfall if Iraq's oil stops flowing. He made the point that Washington was compelled to hold off its attack on Iraq until striking oil workers returned to their jobs in Venezuela, which provides 15 per cent of US oil imports. Since 50 per cent of Iraq's oil exports go to the US, Washington cannot afford to go to war if the flow of both Iraqi and Venezuelan oil is cut, particularly at a time when civilian reserves are as low as they are at present.
Venezuela, which provides 15 per cent of US oil imports, is now producing around 1.3 million barrels a day and is expected to be back to 1.5 million to two million barrels a day by mid-to- late March when pundits predict war is set to begin. However, the resumption of Venezuelan exports to the US does not mean that it can count on security of supply. For one thing, Venezuela has not resumed the export of refined products which are in short supply in the US. For another, Venezuelan production will still be well short of its capacity of three million barrels a day when it is predicted the US will go to war. The cessation of Iraqi exports of around 1.7 million barrels a day could create a serious shortfall because it is unlikely that other members of the Organisation of Petroleum Exporting Countries (OPEC) will be able to make up for the loss of both Iraq's exports and one-half to one-third of Venezuela's exports.
While the strike has ended, the situation in Venezuela is unstable. President Hugo Chavez is still battling with the opposition. Fresh unrest could mean a reduction or suspension of exports.
Political uncertainty in Nigeria, another major exporter, increases the risks of Washington's war.
Industry analysts argue that the price could continue to climb from the current $35-37 per barrel to $40 and, ultimately, soar higher to $50, and, if a war leads to civil conflict in Iraq, to $100. To mitigate the potential crisis, analysts recommend that the US should release oil from its Strategic Petroleum Reserve before war starts and encourage Western European governments to do the same. So far, George Bush has resisted pressure to halt the rise in the price of oil by tapping the reserve, which provides the US with a 53-day supply if all imports are cut. The reserve has, in the past, been used to bring down or stabilise the price of oil, but Bush is unlikely to release stocks for this purpose because of the risks to supplies posed by the "unintended consequences" of war.
Even if Venezuela manages to raise and sustain its output and the loss of Iraq's exports is made up by increased production by OPEC, the already tattered nerves of the volatile oil market will remain jittery, keeping prices high.
The magnitude and length of the "shock" will be determined by the speed of the US military campaign. If pumping installations, refineries and loading facilities are preserved, Iraq could, in theory, resume exports at the present level. However, if Iraq's oil installations, seriously degraded by 12 years of sanctions, are damaged in fighting or sabotaged, it could take many months to restore production.
While MEES reported that there "is no evidence thus far that the regime in Baghdad has taken steps to blow up oil wells in the event of a US-led attack on Iraq," this does not mean Baghdad will not adopt a scorched oil field policy. Or, it could mine strategic export installations, such as pumping stations and loading terminals. This would reduce post-war output and slow the recovery of Iraq's oil industry.
The second negative consequence could be widespread popular protests against regional rulers -- Arab, Turkish and Iranian -- for either failing to prevent Washington's onslaught on Iraq or permitting the US to launch the offensive on Iraq from their territory.
Qatar, Kuwait, Bahrain and Turkey, where US strike forces are based, are particularly vulnerable. Saudi Arabia and Kuwait have already tightened security at oil installations for fear of sabotage by domestic militants.
The costs to the world economy of an "oil shock" and instability in the region will not be offset by an Iraqi "oil bonanza". Iraq's current production level, hovering at around two million barrels a day, is low because Iraq's infrastructure has not been modernised, properly maintained or upgraded since sanctions were imposed in 1990. Only 24 of Iraq's 73 oil fields are working at the present time and 20-40 per cent of its wells are at risk.
Khadduri estimates that at least $3 billion must be invested to raise output to its pre-sanctions level of 3.5 million barrels a day. He said that this process could "take from two to three years from the day stability has been restored." Other experts believe Iraq may need $10 billion beyond that initial sum and six years of redevelopment to increase output to five million barrels a day.
The foreign oil experts described the present situation in Iraqas follows: "Most Iraqi equipment is more than 20 years old. Existing installations have been degraded by a lack of fresh investment, new equipment and spare parts during the 12 years of sanctions. During this period pumps have been rigged with crude replacement parts and Iraq has had to purchase inferior Chinese and Russian equipment to replace worn out US machinery. Sulfurisation is heavy enough to change Basra light to medium. Water is getting into the pipeline . Communications equipment is out of date. Management has become a problem because there are no new people taking jobs in the industry. Some highly competent managers and many capable technicians have emigrated due to low pay and the lack of a future in Iraq for their children." Iraq has managed to sustain its output at two million barrels a day, he said, "only because of the heroic efforts of the former Oil Minister Amir Rashid, his staff and the employees of the State Oil Marketing Organisation." Any disruption could cause serious cuts. After Saudi Arabia, Iraq has the second largest proven oil reserves in the world -- 112 billion barrels -- and 220-300 billion barrels of probable and possible reserves. Iraq also has huge potential in the area of the export of natural gas and refined petroleum products, banned under the sanctions regime. Iraq's production costs are amongst the lowest on earth, averaging around $1.50 per barrel as compared with $2.5 for Saudi Arabia and $4 for the US. Iraq is not only producing at less than half capacity, but is also unable, under sanctions, to bring newly explored and assessed areas into production. To achieve this end, another $30-50 billion may need to be invested over more than a decade.
This being the case, Iraq's oil sector is unlikely to produce large returns for 10 years. Meanwhile revenue from post-war exports will have to be used to provide food and medical supplies for the Iraqi populace and reconstruct the country's infrastructure and health, educational and welfare systems, seriously damaged by two decades of warfare and 12 years of punitive sanctions. However, oil cannot pay for all this. Iraq's gross domestic product is less than one-third of what it was in 1990. The doubling of the population over the last 20 years, combined with falling oil prices means that per capita oil wealth is $700 today as compared with $6,000 in 1980. Money will remain a serious problem for post-war Iraq, particularly if the victors try to recoup some of the cost of the war from the country's oil revenues and continue to exact reparations resulting from Iraq's occupation of Kuwait and demand repayment of long-standing debts.
Al-Ahram Weekly Online : 27 Feb. - 5 March 2003 (Issue No. 627)
Located at: http://weekly.ahram.org.eg/2003/627/sc3.htm