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Fighting for Oil?

June 1, 2004 Topic: Economics Regions: Asia Tags: BusinessGulf WarIraq War

Fighting for Oil?

Mini Teaser: It is hard to find any public statement from an American official justifying the ouster of Saddam Hussein in terms of oil.

by Author(s): Edward L. Morse

It is hard to find any public statement from an American official justifying the ouster of Saddam Hussein in terms of oil. Yet oil had everything to do with regime change in Iraq--and it would be hard to find an official elsewhere, and certainly not in the Middle East, for whom the linkage would be anything but direct.

Both the Gulf War and the ouster of Saddam a dozen years later were essentially about oil. Saddam would not have been a threat to the status quo in the region in a way vital to U.S. interests if it were not the center of the world's oil supplies. Nor could he have mustered the wherewithal to build a powerful military machine or to have developed WMD capabilities without the cash generated by oil exports. And outsiders, especially the United States, would not have been as concerned about his attacks on his two neighbors--Iran in 1980 and Kuwait in 1990--if they did not believe that his military successes, unchecked by U.S. power, could have altered the balance of power to the detriment of U.S. strategic interests by threatening directly Saudi Arabia, the Emirates, Qatar and Oman and the passageway through the Strait of Hormuz: Saddam could have controlled the taps of up to 24 million barrels a day of the world's oil--or nearly one-third of the globe's total supply.

But few if any people who analyzed the geopolitics of oil before spring 2003 would have predicted--let alone been able to forecast--how radically different the energy situation is today, one year later. How might we sort out these ironies and contradictions? And how can we begin to assess how history likely will judge the role of oil in this critical event in U.S. foreign policy?

Three Dimensions

There are three dimensions to this question that provide criteria for passing judgment. The first dimension is the "geopolitics of oil"--the desire, in a post-9/11 world, to use Iraq and its oil sector as a fulcrum to transform existing realities. After September 11, three concerns were raised. First, there was apprehension about Saudi stability and the potential for upheaval, if not revolution, from within the kingdom and its impact on the global economy. Second, there was heightened awareness of high oil prices, which supported high rents from oil resource exploitation, and a flow of funds to activities that were antithetical to vital U.S. national security interests, including terror as practiced by Al-Qaeda. And finally, there were concerns about long-term growing dependence on OPEC oil and the monopolies that governments in core OPEC countries hold over the largest oil resources in the world so long as the governments in these countries carry out policies that restrict investment and production.

Iraq was thought by many--some of them occupying high positions in the White House and in the departments of State and Defense--to be the key to overcoming each of these concerns. Many geologists both from Iraq and elsewhere believed the country's reserves were twice those of conventional wisdom, or about on a par with Saudi oil resources, which could mean that Iraq could be the new Saudi Arabia. Postwar Iraq would eagerly move to return to the country's pre-1991 production capacity of 3.5 million barrels a day. A new regime could attract foreign investment that would enable it to aggressively and quickly double its pre-sanctions capacity by 2010, enabling it to rival Saudi production potential of 10 million barrels a day.

The second dimension in judging the role of oil relates to what spokesmen for Foggy Bottom and the White House insisted on both before and during the Iraq War, that Iraq's oil would be treated as a trust for future generations of Iraqis. The stated American goals were to preserve the integrity of the oil sector, to restore it and to allow Iraqis to control it. Malapropisms from members of the administration who spoke of ways that Iraqi oil would pay for the war, or pay for reconstruction, or provide collateral for loans for the rebuilding effort, fueled many concerns and speculations about ulterior motives, but in the end came to naught.

Finally, there is a third dimension to the role of oil in formulating Iraq policy, which has to do with what has happened to the international oil sector, partially as a result of the attack and its consequences. Here the striking contrast is between the expectations widely held not only in the United States, but also among OPEC member states and in the analytical community, that the tight pre-war market would give way to a rather soft market, with substantially lower oil prices. Yet the result is the tightest market the world has confronted since the late 1970s and early 1980s.

Despite the rhetoric, it is clear that the actions and inactions of both Washington and the occupying administration in Baghdad, whether under General Jay Garner or Ambassador L. Paul Bremer, did nothing to lay the basis for transforming Iraq into the next Saudi Arabia. They immediately turned over direct administration of the oil sector to Iraqi professionals and later ceded control to the CPA's appointed officials. They allowed Iraqi officials to run Iraqi oil sales and to plan Iraqi oilfield development. Washington basically limited its efforts to purchasing fuels in short supply and to assessing and funneling money to reconstruction of oil fields and oil infrastructure. It did virtually nothing to lay the foundations of an investment regime or even a foundation for an oil partnership with Baghdad in a post-occupation environment that would even begin to suggest reliance on Baghdad as a surrogate or replacement for Riyadh. Indeed, all the evidence points in a different direction. In all fairness, Washington actually tried to push the Iraqi authorities to build a strong national oil company to replace the fragmented power vacuum that enabled the Iraqi oil ministry to control all commercial activities related to Iraq's petroleum. The intent was a new regime to foster foreign investment, but Iraqi authorities ignored these efforts. In the end, vested local Iraqi political interests have prevented even this sort of reform from being adopted.

If Washington has done little to support the thesis that Iraq was to be the new Saudi Arabia, what about the second dimension of our analysis? How has Washington performed as protector of the interests of the Iraqi people in maintaining the integrity of Iraq's oil sector? While public documentation about these efforts are difficult to come by, it is fair to say that any assessment of Washington's management of Iraqi oil would give the occupier very low grades.

Washington has, if anything, provided too little oversight to the Iraqi oil sector, and did not even implement rudimentary mechanisms to assure transparency. It even dismantled such controls as did exist when the UN administered the Oil for Food program. Thus, contrary to its obligations to the United Nations, let alone to the Iraqi people, Washington failed to monitor the flow of Iraqi oil by allowing UN overseers to leave and not replacing inspectors with a system to monitor the flow of exports. By suspending oversight of contracts, it enabled Iraqi political authorities to sign whatever contracts for the sale of oil they wanted, with no ability to judge whether oil was being sold at market rates. Nor has the CPA been able to determine whether side payments were being made to Iraqi officials similar to those that were legendary under the Oil for Food program, for they installed no system of controls to account for revenues received from oil sales.

If even the failure to install such rudimentary controls and guidelines were not enough, other policies pursued by the coalition can be seen as having impaired the security of oilfield facilities and delayed the restitution of even pre-Iraq War oil production capacity. We leave aside any commentary on the scandalous payments through Kellogg, Brown and Root for oil products in short supply in Iraq at prices substantially higher than those prevailing in the region for gasoline, diesel and liquefied petroleum gases like propane. This has been the subject of press and Congressional inquiries. It is also the case that the dismissal of groups defending oilfield facilities, including pipeline infrastructure, has had its toll on oil infrastructure integrity and resulted both in the delay in oilfield and infrastructure repair and frequent interruptions to the flow of oil exports. What is more, actual damage done to these facilities, including the bombing of the critical pipeline junction under the Al-Fathi bridge during the battles in 2003, which still has not been repaired, have severely constrained Iraqi export potential. until these repairs are made, exports from Kirkuk to the Turkish port of Ceyhan will be limited to half of what they were before the Iraq War.

This list of errors of omission and commission are just the beginning of what will eventually come to light. undoubtedly, Washington's failure to protect the integrity of this vital resource on behalf of the Iraqi people and to build a political infrastructure for controlling the sector will cast long shadows on the occupation, even if, technically, Washington has helped to restore pre-war levels of Iraqi production.

Essay Types: Essay