The dilemma of Iraq's oil

"Iraq's oil can provide the financial resources to re-build the nation's economy," says Christopher Flavin, the Institute's president. "But an internal or external struggle to control that oil could derail efforts to revitalize Iraq. It is a sad geopolitical fact that of the dozen major exporters of oil, only Norway has a stable and representative political system. Everywhere else, the concentrated, easily extracted wealth that oil provides has led to dictatorships, corruption, and continued poverty for most citizens."

Iraq has produced roughly 2.5 million barrels of oil per day in recent years, making it the world's 12th largest producer. But Iraq has the second largest proven reserves, 112.5 billion barrels, second only to Saudi Arabia, and more than three times the level in the United States.

"This oil represents a huge source of funds for Iraq's reconstruction, but efforts to restore its oil exports will soon run headlong into the complexities of a nation without a government," says Worldwatch Senior Researcher Michael Renner.

"Efforts by the Bush Administration to control Iraq's oil, including the delicate process of signing contracts with foreign companies during the interim period, will only confirm the suspicions of millions of Iraqi's that the US has come to their country mainly for its oil."

New oil company

The administration's plans face an even more immediate hurdle: it has no legal title to Iraq's oil. Control of that oil currently rests with the United Nations, under the terms of earlier Security Council resolutions that channeled all oil revenues into the oil for food program. No legitimate oil company can take the risk of purchasing oil that has a legal status equivalent to the Iraqi antiquities now popping up on international art markets.

"The Bush Administration's mantra that 'Iraq's oil belongs to the Iraqi people' will soon be put to the test, as it seeks to get Iraq's oil back on the world market." says Flavin. "To ease the suspicions of Iraq's citizens, and to secure the Security Council needed to lift sanctions, a legitimate authority will have to be created to broker the oil."

Flavin suggests that the way forward is by creating, through the Security Council, a highly respected, international board that supervises Iraq's oil exports and use of the resulting revenues for development of the country. Such a panel would be composed of eminent persons from Iraq and other parts of the world, and be empowered to oversee the awarding of oil contracts, to ensure that Iraqis themselves get most of the business and that offshore companies, whether they be Russian, French, or American, not get preferential access.

Transparency needed

"The challenge is to create a strong and transparent oil economy in Iraq, with effective government controls, targeted international investment, and broad distribution of the revenues for essential services such as schools, hospitals, and transportation," Flavin says. "Without a strong new base, Iraq is likely to follow the sad history of other oil-exporting nations where oil wealth has actually blocked economic and political advancement for most citizens. An unseemly feeding frenzy, or the miraculous emergence of Exxon or Haliburton with lucrative contracts, would severely undermine the prospect for a successful political transition in Iraq."

For the world as a whole, Iraq's oil could slightly ease the shortages of recent months, but will hardly provide the gusher that some have suggested. It is expected that Iraq's oil production might eventually be raised to 2-3 million barrels per day above pre-war levels. But this will take several years and tens of billions of dollars of investment. By the time the additional oil is available, world oil demand (now roughly 75 million barrels a day) will have increased by an even greater amount.

Iraq's oil will therefore do little to change the fact that world oil demand and supply are projected to be tightly balanced throughout the next decade-and prices are likely to be volatile as a consequence.

Related links:

• Policy Article: Blood and Oil: Alternatives to War in Iraq, by Worldwatch senior researcher Michael Renner .
  

• World Watch magazine article: Oil and Blood by Michael Renner
  

• World Watch Paper 157 Hydrogen Futures, Toward a Sustainable Energy System
  

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