Global Policy Forum

By John Sfakianakis

As the US continues its military build-up in the Gulf, convinced that Iraq has "weapons of mass destruction", the UN chief weapons inspector, Hans Blix, has said that "no smoking guns" have yet been found. Some say that an invasion might only be weeks away. Others proclaim that war is not an inevitability. All that is clear is that war, if it comes, will commence with an aerial bombardment followed by a ground invasion. But what would be done about Iraq's oil?

Iraq's proven reserves of 110 billion barrels of crude oil are the largest in the world outside Saudi Arabia. Iraq contains oil that is accessible and easy to extract, hence very marketable and attractive. At current production levels, nearly three million barrels a day, Iraq's oil reserves would last some 128 years, according to 2001 data from British Petroleum. Even if production were doubled, assuming considerable inward investment in the oil industry, Iraq would be left with more than 60 years worth of oil, assuming no new reserves were discovered. At current production levels, Kuwait, the United Arab Emirates (UAE) and Saudi Arabia have reserves that will last longer than anyone else, except Iraq. US and Egyptian reserves are expected to last for only another 10 years or so.

Without doubt when sanctions are lifted, Iraq's oil production will increase. More oil pumped out of Iraq will have an impact on oil supply and markets.

It is not just that US energy policy interests converge on Iraq. A group of neo-conservatives have been empowered since 11 September 2001. This group, headed by Secretary of Defence Donald Rumsfeld, his deputy Paul Wolfowitz and Defence Policy Board chairman Richard Perle, are trying to take advantage of Iraq's potential, at the same time promoting their own agenda. This revolves around undermining Saudi Arabia's leading role in the world petroleum market and reducing its share of world exports. The traditional way of looking at Saudi Arabia as a strategic partner is being shaken. For these neo- conservatives, Saudi Arabia is run by a royal family that is corrupt, enforces an antiquated educational system and is a source of religious extremism. Some of them have even described Saudi Arabia as a breeding ground for violent antipathy towards the US.

These neo-conservatives are also openly pro- Israel. They view Israel as the only democracy in the Middle East and the only trustworthy strategic ally the US has in the region. In this view, Iraq is a potential threat to Israel, providing sufficient justification to commit the US to a unilateral military engagement.

Neo-conservatives and their backers are also promoting other changes in the global oil industry. Suggestions have been made that Nigeria leave OPEC. Russia has been asked to play a greater role in global oil price setting through the maximisation of its private companies' oil production. However, Russia's ability to become a strategic supplier of oil has been exaggerated by the neo-conservatives. Current Russian oil will last another 20 years at best. Russia will not be able to replace the Gulf as a swing producer and is no match for Saudi or UAE production (together they have excess capacity of around 3 million barrels a day). Nevertheless, private Russian oil companies were given greater lobbying access in Washington, more so than the oil-rich Gulf states.

What the neo-conservatives and most oil pundits failed to predict was the Venezuelan crisis and its impact on oil prices. Venezuela normally accounts for about 13 per cent of US oil imports. Thus, recent events in the country have had a profound effect on prices.

The pricing of oil is not simply a supply and demand equilibrium. It is also dependent on the psychology of the commodities markets, which hinge on future risk and expected outcomes, such as wars, regime change, even cold weather. At the moment, all of the above criteria influence the current price of oil.

Iraqi oil is extremely attractive because of its relatively low cost. North Sea oil, extracted out at sea, costs around $3 to $4 a barrel to produce. According to some preliminary estimates, Iraqi oil could be extracted for as little as 97 cents a barrel.

In the future, Iraq could be producing between $40 and $80 billion worth of oil a year. Any share of this would be fought over by the multinational oil companies. Indeed, Ahmed Chalabi, who heads one of Iraq's most powerful dissident groups, the Iraqi National Congress, has already met executives of three US oil multinationals to negotiate the carve-up of Iraq's massive oil reserves post-Saddam. Chalabi has made clear that he would reward the US for removing Saddam with lucrative oil contracts, telling the Washington Post in November that "American companies will have a big shot at Iraqi oil".

Saddam, on the other hand, is believed to have offered the French company, Total Elf Fina, exclusive rights to the largest of Iraq's oil fields, the Majnoon, which may contain up to 30 billion barrels, twice the company's entire output. In mid-January, Iraq also signed a fresh contract with the Russian company, Stroytransgaz, to develop Iraq's Western Desert, once UN sanctions have been lifted. Additionally, both Russia and China have sought deals on the huge West Kurna and Rumaila fields.

The total value of Saddam's foreign contract awards could reach $1.1 trillion, according to the International Energy Agency's World Energy Outlook 2001. Hence, Iraq is an important component of the neo-conservative's search for alternative oil suppliers. Even Turkey is competing to share Iraq's oil by examining old international treaties to determine what rights it has over oil fields in northern Iraq. Turkey's state oil company was granted permission by the UN Security Council to begin exploratory drilling in oil-rich areas north of Kirkuk in September 2001.

Invasion or no invasion, it is important to note that there is a change of perceptions in Washington about the Middle East. This shift has rendered old views on the region obsolete in the short to medium term. It is hard to see what would make Washington's new policies lose their momentum or force.

John Sfakianakis is a research fellow at the Centre for Middle Eastern Studies, Harvard University.