Global Policy Forum

Deciding the Future of Iraq’s Oil Wealth


By Yahia Said*

ISN Security Watch
July 12, 2004

The diverse meeting of Iraqi and international officials, oil men, politicians, economists, and activists in London last week was the first attempt to hold an open and rational debate about Iraq's oil policy.

The group that met at a London hotel last week to discuss ways to manage Iraq's oil wealth could not have been more diverse. There was Judge Radhi - the man in charge of setting up the Iraqi equivalent of the US' Federal Bureau of Investigation (FBI) - a career prosecutor who claims to be receiving help from the US agency to pursue corruption among both Iraqi and US contractors. There was Hussain Al-Shahristani, the deputy speaker of parliament and a former nuclear scientist who spent ten years in solitary confinement under Saddam Hussein. He is now one of Iraq's most influential politicians. There were wizened Iraqi economists, including the head of research at the Central Bank, the economic editor of the largest circulation Arab daily, and the former Iraqi planning minister. Oil men were there too, including the man who founded the once venerable Iraqi National Oil Company; the founder of Norway's Petroleum Directorate, who also happens to be an Iraqi; trades union activists; and a man who used to convert cargo ships into oil smuggling vessels for a living. Non-Iraqi participants included officials from the International Monetary Fund (IMF), the US and British governments, and academic economists, political scientists, journalists, and activists. The oil sector was represented by British Petroleum's (BP) vice-president for strategy. A number of representatives from international financier George Soros' Open Society Institute were also present, as it co-organized the event with the London School of Economics.

No shortage of lively debate

Despite its diversity, the group managed to get through three days of intense deliberations without incident. This is especially remarkable considering the issues addressed - such as whether or not to privatize the Iraqi oil industry, how to divide the revenues among Iraq's regions and communities, and how to prevent the abuse of oil wealth. There was, however, no shortage of lively debate. Almost every oil industry representative started his speech with a statement of how fabulously well-endowed Iraq is with oil. Almost all political scientists and activist saw that fact as a cause for concern as much as a cause for optimism. Michael Ross of UCLA presented statistical evidence proving that oil and democracy do not mix. Paul Collier of Oxford University showed evidence that this is mostly the case when democracy is reduced to free elections and that substantive democratic regimes with systems of checks and balances, such as a free press and an independent judiciary, better enjoy their oil without negative side effects. All participants agreed that when it comes to oil the political and social are inextricably intertwined with the economic and technical, and that policies that focus on one side over the other are ineffective at best and catastrophic at worst.

Foreign and private vs. national oil companies

Participants were split on the matter of how big a role foreign and private oil companies should play in Iraqi. Many economists and oil men argued that Iraq needs tens of billions of dollars of investments in the coming years as well as new skills and technologies that can only be supplied by multinational oil companies, suggesting a need to move quickly on opening up the sector. Others, like Emad Rhaif, a young trade union activist from Basra, or Karim Shamma, a veteran oil man, suggested that investment needs were much lower and that a significant part could be generated domestically. Even they, however, agreed that foreign participation, including from multinational oil companies was necessary to provide badly needed skills and technologies. In the end, there was agreement that the sector should be led by a strong, independent, commercially viable national oil company, which would enter into various cooperative arrangements. The participants agreed that any such arrangements with foreign and domestic private actors should be conducted in a transparent and open manner, and that the rules of engagement should be consistent and clear. There was also agreement that large-scale projects with far-reaching, long-term consequences are better left until security and political conditions improve and the fundamental elements of the rule of law are in place.

Distribution of oil revenues

The debate about the distribution of oil revenues was much less confrontational than anyone expected. Bayan Abdulrahman, the Kurdistan High Commissioner in Britain, argued for oil revenues to be distributed on the basis of equity, justice, and development for all. She suggested that even if Kirkuk was to become part of the Kurdish federal region, oil fields in that province should continue to be managed by the central government. This suggestion was echoed by the deputy speaker of parliament. The debate that ensued revealed more about the crisis of trust amongst Iraq's various communities than about disagreement on how to share oil revenues. The participants seemed to agree that oil revenue distribution was no substitute for the hard work needed to rebuild trust. They also agreed that in order to ensure transparency and accountability in the management of oil revenues they should all flow through the central government budget under full supervision of the national assembly.

Black market oil

Abbud Karim the man who used to rig cargo ships to smuggle oil, caused an uproar when he suggested that British troops patrolling Iraq's costal waters like the US troops before them during the sanction years were getting a cut from oil smuggling. His contention was not supported by any evidence but was echoed by other Basra-based oil workers. Simon Taylor of Global Witness, which specializes in investigating the abuse of natural resources and their use in conflicts, was keen to follow-up on these allegations. The chief economist at the Iraqi Finance Ministry, an oil man himself, had the unenviable task of presenting the government's plan to phase out fuel subsidies. Gas in Iraq is sold at the pump at an official US dollar price of 1.5cents per liter. Given the shortage of refining capacity and other bottlenecks in the production and distribution of oil, the government has to import gas at a US dollar cost of 45 cents per liter. This will cost the government an estimated US$2.4 billion this year alone. This arbitrage opportunity is the main driver for smuggling and the black market in oil products, which is exacerbating shortages. The government cannot sustain this level of expenditure and is required by the IMF to devise a plan for phasing out the subsidies by the end of this year. This is, however, highly controversial and may be socially explosive. As the veteran oil man, Shamma, said during the meeting, removing subsidies today would be nothing short of insane. The participants, including the IMF representatives, agreed that the phasing out of subsidies should be coupled with the development of social safety nets and public education on the subject.

Lack of transparency

The participants spoke of the lack of transparency both in the production and export of oil and in the use of its revenues. Familiar themes were sounded about the absence of metering at the well heads and the lax contracting and accounting practices at the now-defunct US-led Coalition Provisional Authority (CPA). In general, however, Iraqi oil revenues today are fully committed to financing the public sector payroll, the food rations that are still distributed to every family in the country, and to the aforementioned fuel subsidies. This leaves very little room for maneuver, even if you factor in corruption and abuse of resources. Given their socially explosive nature, no politician no matter how corrupt would dare divert substantial resources from any of these programs. The participants did not reveal any smoking guns about oil contracts, either. Oil companies and Iraqi oil officials seem to be conducting mating rituals through various exchanges - pro-bono training programs and conferences like the one this article is about - but the lack of security and legal clarity as well as the political sensitivity of oil in Iraq seem to have prevented them from consummating these relationships for the moment.

Rational debate

The meeting was its own important message. It was the first attempt to hold a rational debate about Iraqi oil policy involving such a broad cross-section of stakeholders. Only through debates like these can Iraqis produce and sustain consensus over optimal policies and mobilize constituencies to counter rent-seeking and other perils of oil dependence. Timely and accurate information on all aspects of the oil economy is a precondition for such debates. As Tarry Karl of Stanford University put it: "Civil society is useless without information." The participants left the meeting seemingly determined to pursue transparency on all matters related to Iraqi oil.

About the Author: Yahia Said is a research fellow at the London School of Economics. He specializes in issues of transition in post-conflict and post-totalitarian societies. He has been conducting a project looking at transition in Iraq over the past two years.

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