CHALLENGE OF AMERICA / U.S. oil strategy targets Iraq, Russia

www.yomiuri.co.jp Takao Kuroi Yomiuri Shimbun Correspondent

This is the ninth in a series of articles on international security issues facing the United States and the rest of the world.

On Dec. 20 and 21 in Washington, 11 Iraqis working in the oil industry and living outside Iraq gathered for a meeting hosted by the U.S. State Department to discuss the future of Iraqi crude oil and energy.

Details of what was discussed at the meeting, and even the list of attendees and the meeting's locale, have not been disclosed by the department.

Though the U.S. government has remained silent as to the goal of the meeting, people associated with the oil industry have said Washington's decision to hold the conference reflects its desire to gain a greater say in Iraqi oil exports by cooperating even more closely with Iraqi dissidents, in the belief the government of Iraqi President Saddam Hussein will collapse sooner or later.

Iraq has 112 billion barrels of oil in reserves, the second-largest reserves in the world after Saudi Arabia. But under U.N. economic sanctions, Baghdad now is allowed to export crude oil only to purchase humanitarian supplies, such as food and medicine.

If crude oil from Iraq is released into worldwide markets, the supply-and-demand relationship will change and oil prices will drop quickly.

In that event, the price-controlling power of the Organization of Petroleum Exporting Countries, which has dominated the global oil market, will be weakened dramatically, resulting in the "democratization of the oil market" sought by the United States.

In addition, if the United States can gain rights to Iraqi oil, Washington's influence on oil markets will increase drastically.

Though the U.S. government has denied the allegation, many in the oil industry hold the deep-rooted opinion that the purpose of the anticipated attack on Iraq is securing U.S. crude oil interests there.

The United States and OPEC leader Saudi Arabia share a special relationship, under which Saudi Arabia stabilizes oil prices and the United States protects the country from invasion by other nations, according to Joe Barnes, a research fellow at the Baker Institute for Public Policy at Rice University in Houston.

The relationship has stabilized crude oil prices since the 1980s, working as the engine for world economic growth.

However, the situation changed completely after the Sept. 11, 2001, terrorist attacks on the United States.

Because many of the attackers came from Saudi Arabia, hard-liners in the United States after the attacks argued even more strongly that Saudi Arabia was the United States' real enemy.

In Saudi Arabia also, anti-U.S. sentiment grew amid increasing social anxiety about various domestic problems, such as the rising unemployment rate. This sentiment was evident in the Saudi refusal to provide bases to U.S. forces in the event of an attack on Iraq.

There are lingering rumors that Saudi plutocrats are withdrawing funds from the United States.

At the end of the summer, people working in crude oil markets circulated the rumor that Nigeria would secede from OPEC to comply with the wishes of Washington.

Nigeria has actively developed its oil fields with investment from U.S.-affiliated major oil companies, and conflicts of opinion have surfaced between the African country and Saudi Arabia.

Though both the U.S. and Nigerian governments denied the speculation, an official of a Japanese company in Nigeria said, "The controversy over Nigeria's secession is a U.S. trick to estrange OPEC members."

OPEC on Sunday decided to increase crude oil output by 1.5 million barrels per day, partly because of the current general strike in Venezuela, to promote its control of the global oil market.

But the United States has been making careful preparations to reassert the control it enjoyed during the golden years of its major oil companies.

As if in inverse proportion to cooling relations between the United States and Saudi Arabia, Washington and Moscow have been warming up recently.

Russia is now the world's second-largest oil producer, due to efforts by Russian President Vladimir Putin's administration to increase oil output.

In early October, the first U.S.-Russia Energy Summit was held in Houston, the home turf of U.S. President George W. Bush.

Energy ministers and top officials of more than 100 oil and gas companies from the two countries gathered to exchange opinions about crude oil exports from Russia to the United States and expanding U.S. investment in Russia.

At a U.S.-Russia summit meeting in November in St. Petersburg, the two leaders issued a joint declaration promoting energy development cooperation by the public and private sectors, indicating the countries are still in the honeymoon phase of their relationship.

For the United States, which consumes a large volume of energy, lowering the nation's dependence on OPEC, which exports about half the oil consumed in the United States, is an urgent task also from the viewpoint of national security.

Also for Russia, which relies on exports of oil and gas for about 40 percent of its federal fiscal revenue, increasing crude oil exports by inviting U.S. investment is crucial to economic growth.

Many people believe a "gentleman's agreement" with the United States was behind Russia's vote in favor of a U.N. Security Council resolution on inspections of weapons of mass destruction in Iraq, though Moscow has opposed attacks on Iraq and urged the early lifting of economic sanctions against Baghdad.

Observers say the agreement guarantees that the United States will respect Russia's economic interests in Iraq after the collapse of Saddam's government, in exchange for Russia providing a stable crude oil supply to the market.

However, it is uncertain whether the cooperative relationship between Washington and Moscow will continue unchanged.

A Russian political source with extensive knowledge of the oil industry openly expressed his distrust of Washington, describing an incident in December as "a plot by the United States."

The incident in question involved the Iraqi government notifying Lukoil, Russia's largest oil company, that its contract to develop a Iraqi oil field had been canceled.

In general, the reason for the contract cancellation was believed to have been Russia's decision to vote for the Security Council resolution on weapons inspections in Iraq.

But the Russian political source said the real reason was that Lukoil executives had contacted the Iraqi dissidents who were being wooed by the U.S. oil industry.

Russia, along with China and France, has negotiated with the Saddam administration against the wishes of the United States, and gained rights to develop oil fields and other interests in Iraq.

Therefore, Moscow is concerned over whether Washington, which targets oil interests in Iraq, really will respect Russian economic interests in the Middle Eastern country.

The interests of Russian oil producers are not necessarily the same as those of the U.S. government, which hopes to lower crude oil prices.

The cost of drilling for crude oil in Russia is about 7 dollars per barrel, much higher than the 3 dollars to 4 dollars average for drilling crude in the Middle East.

For the Russian government, which assembles the national budget on the premise crude oil will be priced at 21.50 dollars per barrel, the current price, which hovers at about 30 dollars per barrel, is "comfortable," a source in the Japanese oil industry said.

If the full-scale development of Iraqi oil fields begins and crude oil prices drop, Russia's fiscal condition would worsen drastically.

If the situation weakens the power base of the Putin administration, which has adopted a cooperative policy concerning the United States, it could result in an unstable political situation and a resurgence of regional conflicts and terrorist acts.

In this case the United States finally will have to pay the price for its policies, in the form of a new war with terrorists.

Leonidas Drollas, chief economist at the Center for Global Energy Studies, said the very survival of a cartel organization such as OPEC in the current oil market has become difficult.

The United States faces a challenging task in terms of building a new order to replace the old in the world oil market.