Global Policy Forum

The US is forced to accept that export revenues from Iraq's dilapidated oil industry will not fund its reconstruction.

As insurgents target oil installations and Iraqis queue for fuel, the Bush administration has abandoned its pre-war assertions that Iraq's natural resources would largely fund reconstruction. While opinion polls still show a majority of Americans support the war, most do not think they should be paying so much to rebuild Iraq. Before the war, United States officials engaged in a delicate balancing act.

They sought to counter the pervasive belief in the Middle East and Europe that the war was all about oil, while vaguely telling the US taxpayer not to worry about the cost. Behind the scenes, however, senior figures in the administration were being advised by former officials, experts and corporate bosses that the dilapidated Iraqi oil industry was in no way a financial lifeline. 'With all the information available, it seems that those in charge chose not to know,' said Mr James Placke, a senior associate at Cambridge Energy Research Associates.

Mr Placke took part in Iraq: The Day After, a report produced by the Council on Foreign Relations (CFR), a think-tank, shortly before the war. Mr James Schlesinger, a former secretary of defence and energy who co-chaired the independent task-force set up by the CFR, said: 'Nobody believed oil revenues would support reconstruction costs.' But there was an expectation that the industry could be revived more quickly than has proved the case.

He said his advice followed that of the CFR report: that after production costs, the oil industry would provide at most an annual US$10 billion (S$17.1 billion) to US$12 billion, if captured intact with no further deterioration. The CFR study also noted that by late February last year, the Pentagon had still not worked out its plans. Production was then estimated at 2.5 million barrels per day (bpd), with about 1.8 milion available for export. Today, that would be worth about US$20 billion per year.

Before the war, there were already those who were sounding the alarm bells. An oil analyst, who asked not to be named, said his company's presentation to the Future of Iraq project, led by the State Department, warned that oil output would be stuck at around 2.5 million bpd for two years. Under the best scenarios, through developing eight major fields with huge foreign investment, output could rise to 6 million bpd by 2011. It warned that oil revenues would not be enough to run the government and cover reconstruction costs.

Production has just recently climbed back to 2.2 million bpd - the average in 2002. The President's Office of Management and Budget told Congress last week that oil revenues from Iraq last year were US$3.9 billion and were projected to reach US$13 billion this year, not even enough to cover the Iraqi government's operating costs for this year, which are forecast to reach US$15.6 billion. Export revenues are uncertain because sabotage has prevented significant amounts of oil from being exported through the northern pipeline to Turkey.

Iraq's oil ministry aims to increase the country's oil production to more than 2.8 million bpd by the end of March, taking exports to more than 2 million bpd. Its ability to do this hinges on whether or not it can get the pipeline to Ceyhan working again. Keeping it out of trouble, and the northern transit route open, will be even more difficult and just as important.

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