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A future for Iraq's oil

As the United States plans for a possible war in Iraq, an important question has become: What should U.S. policy be toward Iraq the day after the last shot is fired? An integral part of that question is deciding how to approach Iraq’s tremendous reserves of oil. The reserves are huge, second only to Saudi Arabia, but annual oil production is low, due to years of sanctions and war. Increased oil production could pay for a portion of the country’s reconstruction costs, as well as affect world oil supply and prices.

The James Baker Institute at Rice University and The Council on Foreign Relations, two nongovernmental think tanks, have teamed up to craft a vision for Iraq in the event of a U.S.-led ouster of Iraq’s president Saddam Hussein. The hallmarks of the vision, described in a report published Dec. 18, include that Iraq should retain complete control of its own oil sector and that, immediately following Hussein’s fall, revenues from oil sales should be reinvested in oil infrastructure in order to boost production.

The ideas in the report, written by 23 policy experts and energy analysts, have resonated in recent comments by the Bush administration. However, concern that Hussein may intentionally destroy Iraq’s oil fields in the first few days of a war has led some public officials to hint at the possibility of a quick, if temporary, U.S. takeover of the fields. Secretary of State Colin Powell, speaking on Dec. 29, said: “If coalition forces go into those oil fields, we would want to protect those fields and make sure that they are used to benefit the people of Iraq, and not destroyed or damaged by a failing regime on the way out the door.”

“We started talking about this report in August,” says project co-director Rachel Bronson, head of Middle East Studies at the Council on Foreign Relations. “At that time we felt, and we continue to feel, that not enough attention was being given to the day-after issues, which could be harder to manage than the actual fighting itself.”

In Iraq, the maturing of oil fields and the deterioration of oil infrastructure have outpaced new investments in technology and exploration. Over the past several years, average daily oil production has dropped by 100,000 barrels each year. The report estimates that returning to pre-1990 production levels of 3.5 million barrels per day will cost billions of dollars and take months, if not years.

Despite these difficulties, oil production in Iraq remains the number one source of revenue for the country. And, the report says, reinvesting revenues from oil sales back into oil infrastructure is the only sure-fire way to significantly boost the country’s income. “If there is ever going to be an economically independent Iraq, oil is the most immediate short-term way to get revenue back in the country,” Bronson says. However, the report cautions, short-term increases in oil production will necessarily be modest and will not produce the windfall needed to pay all the costs of reconstructing the country after war.

Whatever the immediate fate of Iraq’s oil production, control of Iraq’s oil sector should remain in the hands of the Iraqi people, the report says. The goal of a possible war is to disarm Iraq, dismantling its weapons of mass destruction. The report adds that if the United States takes control of the oil fields, it will only lend credence to critics who argue that the United States is going to war for oil. “A heavy American hand will only convince [Iraqis], and the rest of the world, that the operation against Iraq was undertaken for imperialist, rather than disarmament reasons,” the report says.

Iraq will be able to maintain its own oil sector because it has a cadre of oil experts who know how to manage the reserves well, Bronson says. A few of the top oil industrialists are part of Hussein’s inner circle of friends and relatives, and they will likely be removed and tried for war crimes. However, 85 percent or more of the oil experts are not part of this circle, comprising a skilled work force large enough to efficiently and fully run the oil program.

“Iraq certainly has some expertise because it has been able to, over all these years of sanctions and wars, maintain some oil production without foreign investment or expertise,” says Lowell Feld, an economist at the Department of Energy’s Energy Information Administration.

Iraqi control of its own oil sector does not, however, negate the importance of international investment in developing Iraq’s oil fields, according to the report. It will take between $30 and $40 billion to rehabilitate active wells and to develop new fields, and the Iraqi government may want to enlist international companies to meet this investment cost. The report advocates that, at least in the short-term, the U.N. oversees an Iraqi-led bidding process to ensure that oil contracts are awarded fairly and openly.

Says Stephen Walt, professor of international affairs at Harvard’s Kennedy School: “If this war happens, it is an American production: conceived, written, produced and starring the U.S.A. One way to minimize the repercussions is to try to represent that what the U.S. is doing is on behalf of the worldwide community. … In a post-Saddam Iraq, if the U.S. ended up with all the [oil] contracts, it would look really bad.”

Greg Peterson


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