Global Policy Forum

Outside View Oil Serves But Also Burns Us


By Youssef M. Ibrahim*

Gulf News
October 5, 2004

By mixing oil with politics in Iraq, the United States has started a fire it cannot put out. The Iraqi oil industry, and with it vital exports of Iraqi oil, has collapsed. Compounding matters, catastrophe came at a time when the world is badly in need of more oil, while producers are running on empty, unable to pump more from beneath their sands and seas. Result: Oil prices have shot up to $50 per barrel for the first time in history, maybe $60 tomorrow and who knows what the day after tomorrow.

Politicians may argue about costs and benefits of America's adventure in Iraq and whether the occupation was a good or bad thing. But no one can deny the obvious, which is the move has massively reduced oil supplies from one of the world's major oil producers, which in turn has significantly contributed to shaking the stability, security and price of the world's sole strategic commodity. Equally distressing, there appears to be no end in sight and no substitute for the missing Iraqi oil.

As things stand, the Iraqi oil industry is in ruins. Refineries were looted under the very gaze of American troops and television cameras the very first week of the invasion. Ever since, Iraqi oil fields, terminals, and pipelines are regularly blow up by insurgents in attacks American soldiers have failed to stop. The sum total has been to deprive an oil-hungry world of an average of 2 million barrels a day. In a nutshell, Iraq used to produce 3.5 million barrels a day under Saddam Hussein's iron-fisted rule. On a good day now the country is lucky to pump 1.5 million without interruptions. That is an awesome drop with evident consequences for world economies.

That is not the way George W. Bush and his administration figured things, but then oversimplified political calculations such as those of neo-conservatives always lead to poor outcomes. Those who pushed for war in Iraq thought they had an easy, done deal in three simple steps. One: occupy Iraq; Two: turn it into a private American Gasoline Station Pumping Station (call it USA ONE), doubling production with the help of American oil companies to more than 6 million barrels of oil per day. Three: use this huge new oil to intimidate traditional suppliers, including Saudi Arabia, other OPEC members as well as Russia, which has become a major producer of oil.

But as the proverb says: You do not exit the hamam (steam bath) the same as you entered. Oil is a capricious thing that serves but also burns. In Iraq, insurgents and technocrats appear to have joined hands turning the sabotage of oil facilities into a weapon against American troops and the American-selected Iraqi government. Whether this is right or wrong, moral or immoral is another story, but it has completely reversed neo-conservatives' calculations and incapacitated the government of Prime Minister Eyad Allawi, which is loosing credibility by the day.

Should the disruption of Iraqi oil exports be compounded by any interruption of production from Russia, Africa, OPEC and especially a very vulnerable Saudi Arabia , oil prices are sure to spiral out of control. Thinking of $100 a barrel is no longer crazy if, say, Saudi Arabia were to shut down its 9.5 million barrels of daily production even for an hour.

In Iraq things are not getting better. At the last count, the northern pipeline that carries oil to the Turkish Mediterranean port of Ceyhan has been blown up 37 times in 12 months. Terminals in the south at Basra have been attacked at least 10 times, shutting down all exports of crude oil.

What is worse is no one really knows where the oil revenues are going and how much of any revenues reach the Iraqi people. Graft and corruption are widespread by all accounts, feeding the anger that is feeding the insurgency. Ironically, the United States is now supplying Iraq with gasoline and diesel fuel because Iraqi refineries are still in ruins, and kidnapping expatriates trying to repair them will keep them this way.

Meanwhile, the world still needs roughly 81 million barrels every day. But that same exact number is just about all that can be produced right now so supplies are, as the oil analysts like to say stretched. They are going to get more stretched as demand keeps rising relentlessly by some 1.3 percent to 3 percent year on year, propelled by two huge Asian economic tigers, China and India, with voracious new appetite for oil.

OPEC does not have more to pump right now; neither does Russia, nor do other producers. Deepening this conundrum is the fact that it takes time and money to produce more oil. Billions of dollars in investments must be made in oil fields to increase the quantity that comes out as it takes time from conception to reality. Oil is not an elevator that comes up at the touch of a button. And the investments to produce more oil are not being made.

Take Iraq as an example. To date, of the $18 billion so-called ''reconstruction money'' tagged for Iraq by the United States Congress, less than a billion can be accounted for as disbursed for that exact purpose. While the American oil service company Halliburton looms large in receiving U.S. contracts, the money is not going to rehabilitate the oil sector of Iraq. Instead Halliburton and several other American private contractors are using it to construct latrines, new tent-cities or entertainment facilities for the 140,000 U.S. soldiers fighting the insurgencies destroying the oil fields, pipelines and terminals.

But even in oil rich Saudi Arabia, the government has been too busy spending money in the past decade; it has not invested any in its oil infrastructure. Therefore, Saudi Arabia finds itself today unable to make a difference by pumping more oil. That much discussed excess capacity is turning out to be not there. So much for great advance planning.

About the Author: Youssef M. Ibrahim , a former Middle East correspondent for the New York Times and Energy Editor of the Wall Street Journal, is managing director of the Dubai-based Strategic Energy Investment Group. He can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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