Iraq and Oil

Whether or not the USA will intervene militarily in Iraq cannot be predicted with full certainty today. What is certain is that the current administration has the clear and very determined intention to mount a military operation with the explicit aim to remove President Saddam from power and dismantle his regime. The USA has considerable military might and will probably defeat the Iraqi army very quickly. The US ability to manage the political situation in Iraq that will follow the military intervention raises, however, more serious doubts. It will not be easy to install in Iraq a democratic Western-oriented government that will enjoy the full support of a population deeply divided along ethnic, religious and political lines. Furthermore, the US intention to attack Iraq is causing much disquiet among important allies. To ignore this opposition entails significant political costs likely to be incurred over a very long period of time.

All that may not deter President Bush’s administration from launching an attack.

The two declared objectives – the removal of President Saddam from power and the elimination of the threat posed by the weapons of mass destruction – themselves raise certain difficulties.

There is no doubt that Saddam’s demise will cause much relief not only to all Kuwaitis, given their sufferings during the 1990 invasion, but to most Iraqis who have endured so much oppression for so long . The risks, however, are that a heavy handed military operation will kill many innocent people, cause much destruction, and political chaos. The weapons of mass destruction pose no threat outside Iraq so long as Saddam is confident about his survival. He knows that their use will induce immediate and devastating retaliation. His main objective is survival as ruler of Iraq, and he will avoid courses of action that inevitably cause his immediate demise. The risk is that Saddam will be induced to use these weapons if he finds himself caught with his back against the wall, with no hope of escape and nothing more to lose. It would be tragically ironical indeed if an operation meant to remove the danger posed by these weapons causes them to be used.

Let us assume however that the USA will intervene militarily, and let us speculate about the implications for oil. We need to keep in mind three important facts throughout this analysis. First, Iraq is a major oil producer and can become a leading one in the world if major investments are undertaken to bring its considerable natural reserves on stream.

Secondly, powerful US lobbies want to undermine Saudi Arabia’s leading role in the world petroleum market and reduce its share of world exports. For this reason, they are promoting oil developments in West Africa, suggesting to Nigeria that it should leave OPEC, encouraging Russian private oil companies to maximise production, and are pinning great hopes on the Caspian. They also hope that President Chavez of Venezuela will be overthrown and replaced by a government willing to maximise oil production. More importantly in this context, they would like to install a friendly regime in Iraq who will open the doors to foreign oil companies, increase oil output and contribute to this strategy of diversification. Thirdly, the US objectives regarding an intervention in Iraq are not limited to the removal of President Saddam and his weapons of mass destruction. If successful, the USA will acquire both a military and a political base in the heart of the Middle East from where they will be able to exercise greater leverage on all the neighbouring countries – Iran, Saudi Arabia and the rest of the Gulf oil-exporting countries, as well as Syria and Jordan. A military presence in Afghanistan, Iraq and some Central Asian Republics give the USA strategic advantages vis-à-vis both Russia and China. Clearly the issues at stake go well beyond oil.

The immediate effect of any intervention will inevitably be an interruption of oil supplies from Iraq. The impact on oil prices will depend however on a number of circumstances: the duration of the interruption, whether the oil market is in a state of glut or shortage

at the time of the US attack, and whether additional supplies from other countries or from the US strategic stocks are made immediately available or not.

If the military intervention succeeds in putting in place a regime in Iraq that is on the one hand friendly to the USA and on the other hand able to keep the country united and peaceful, the Iraqi upstream oil sector will be open to foreign oil companies, with the lion’s share of contracts going perhaps to American companies. Oil production will grow significantly after a time lag of, say, three years.

There is no doubt that in this golden scenario, too good to be true, the new Iraqi government will initially seek to maximise the volume of production. This output maximisation policy, particularly if pursued at a time when the market is oversupplied, could cause prices to collapse. One should not however think that the government of an oil-exporting country can remain for a long time indifferent to the impact of low prices on its oil revenues. Sooner or later the new Iraqi government will want to co-operate with other producers to restore prices to preferred levels. All that means that a serious and damaging oil price crisis may occur in this scenario, but that such a crisis will not necessarily last for a very long time.

A more likely scenario is one in which the military intervention causes domestic political chaos in Iraq, inaugurating a long period of instability with one government being overthrown and replaced by another, time and time again. In that case, foreign investors will be reluctant to commit their money to the country. There will be no growth in oil output; even worse Iraqi oil production may fall below current levels.

The most troublesome scenario is one in which the US intervention destabilises politically the whole region. The probability of this happening, low in the short term, is much higher over the long period. Bad seeds sowed now will inevitably produce in the end their poisonous flowers. This is a sobering thought. It should invite great caution from all those who will decide to launch the intervention, and those who may be asked to support it.

By: Robert Mabro