America's crude tactics - Of all the rogue states in the world it is Iraq's oil that makes it a target

www.guardian.co.uk Larry Elliott Monday January 27, 2003 The Guardian

Let's get one thing straight. George Bush's determination to topple Saddam Hussein has nothing to do with oil. Iraq may account for 11% of the world's oil reserves, second only to Saudi Arabia, but the military build-up in the Gulf is about making the world a safer and more humane place, not about allowing America's motorists to guzzle gas to their heart's content. So, lest you should be in any doubt, let me spell it out one more time. This. Has. Nothing. To. Do. With. Oil. Got that?

Of course you haven't. Despite what Colin Powell might say, it takes a trusting, nay naive, soul to imagine that the White House would be making all this fuss were it not that Iraq has something the US needs. There are plenty of small, repressive states in the world - Zimbabwe for one - where the regimes are being allowed to quietly kill and torture their people. There are plenty of small, repressive states with weapons of mass destruction - North Korea, for example - which appear to pose a larger and more immediate threat to international security. But only with Iraq do you get a small, repressive country with weapons of mass destruction that also happens to be floating on oil.

Moreover, the realities of oil dependency are catching up with the world's biggest economy. The US has long ceased to be self-sufficient in oil and, as the recent shutdown of Venezuela's refineries has proved, is therefore vulnerable to its imported supplies being cut off. The growing imbalance between the global demand for oil and discoveries of fresh supplies means that the outlook for the US is even more troubling than it appears. As the director of ExxonMobil, Harry Longwell, admitted in an article for World Energy last year, the discovery of oil peaked in the mid-1960s but demand is expected to continue growing by 2% a year - or the world is sucking oil out of the ground faster than corporations are finding it.

Three choices

Bush and his team know all this. They have worked for the oil industry, been bankrolled by the oil industry, and have spent the past couple of years listening hard to what the oil industry would like, then doing it. Faced with the prospect that on current trends the gap between demand and supply will widen inexorably, Bush has three choices. Firstly, he could listen to the lobbying of executives like Longwell, who are convinced that there is still plenty of oil out there provided the exploration teams are given the freedom to find. That is why Bush has been prepared to court the wrath of the environmental lobby in the US to sanction exploration and extraction in the wilds of Alaska.

The second option is to ensure that the US secures a bigger share of diminishing stocks, buying time in which consumption can continue at its present rate. The seizure intact of Iraqi oil fields is a prime war aim of the US in any conflict, and it is likely that once Saddam has been toppled and an army of occupation has control of the country, the big oil companies will be called in to modernise the country's decrepit oil infrastructure. There have been reports in the Wall Street Journal, denied by the administration, that Dick Cheney held discussions last October with ExxonMobil and other firms about the rehabilitation of Iraq's oil industry. It stretches credulity somewhat to imagine that the subject has never been broached.

In one sense, such an outcome would be no bad thing. A modernisation programme that increased the supply of oil through more efficient production would lead to lower global prices and stronger growth. It might also be environmentally less damaging. Nor, lest we are tempted to get too prissy about this, can it be denied that economic factors have played a big, even crucial role, in determining the diplomatic and military strategy of European countries down the centuries.

But while the Bush strategy has its rationale, it is fraught with risks. One is that the war will not lead to the collapse in oil prices that is predicted by the hawks in Washington. Should the conflict follow the example of 1991, crude could fall quickly to around $20 a barrel. Or prices could hit $50 a barrel if Saddam torches the Iraqi fields and manages to land a couple of Scuds on refineries in Saudi Arabia and Kuwait.

The possibility that an American occupation of the Middle East will destablise the whole region, putting pressure on the autocratic rulers of western client states is a second, perhaps greater threat. It would be a bitter irony if the US found itself in possession of 11% of the world's known reserves only to find that the 25% in Saudi had been seized by a regime with no love for America. Worryingly for Bush, there have already been signs that investors in the Gulf states have been withdrawing their assets from the US, helping to keep shares on Wall Street depressed and contributing in no small measure to the dollar's recent fall. This would turn into a rout should the oil-producing states decide that crude should be denominated in euros rather than greenbacks, a development that has already been canvassed publicly by Opec.

Common sense

The third choice for the US and the rest of the developed world is to tackle the imbalance between demand and supply from the other end - by limiting demand rather than by increasing supply. Most governments, including that in Washington, acknowledge the need to take steps to curb emissions of greenhouse gases, and a blueprint for this, known as contraction and convergence, is available. It would involve setting a safe global ceiling on carbon dioxide and the calculation of the emissions consistent with hitting it; providing equal shares of the global emissions budget for each country so that poor countries were not short-changed; and allowing emissions trading in which countries like the US could pay countries like Malawi to pay for the right to pollute by more than the share allocated to the developed world.

The first problem is political will. Britain's forthcoming energy bill should embrace contraction and convergence, but Whitehall conservatism means a golden opportunity will be lost without political backing from the very top. As Alex Evans of the left-leaning IPPR think tank said last week in a paper on the UK electricity industry, the government needs to focus less on setting targets and more on delivery. Evans says that there would be a dramatic fall in emissions and endless opportunities for business if the government took steps to increase energy efficiency by 20% and to commit itself to producing 25% of energy from renewable sources by 2020.

This will be costly, both in terms of money and effort. But wars, too, are costly. The real lesson of the struggle against Iraq is that the depletion of non-renewable energy resources is a problem that will be persist long after the butcher of Baghdad is dead and buried.

larry.elliott.guardian.co.uk