Saudis worry Iraq war could create oil rival - If attack succeeds, Baghdad's output could top kingdom's
www.sfgate.com Robert Collier, Chronicle Staff Writer Sunday, February 16, 2003
Ras Tanura, Saudi Arabia -- Pipes, ducts, tanks, towers and an infinite variety of refining, storage and shipping facilities stretch for miles along the desert seashore, resonating with a low, almost imperceptible hum.
This is the heart of the Saudi oil empire, an empire that has made the conservative kingdom an indispensable U.S. ally in the Mideast.
To talk about the place is to make superlatives seem almost banal -- Ras Tanura is the world's largest petroleum products export facility, owned by the world's largest oil firm, in a nation that is the world's largest petroleum producer.
But Saudis are worried that their empire may soon be eclipsed by a powerful new challenger rising out of the ashes of war -- Iraq.
If a U.S.-led invasion succeeds in overthrowing Saddam Hussein's government and installing a pro-American regime in Baghdad, Iraq's immense, largely untapped oil wealth will be opened to foreign investment and the country could become the major economic powerhouse in the region, casting a long shadow over Saudi Arabia.
"If the United States takes over Iraq and Iraqi production rises dramatically, Saudi Arabia will lose position in the market and political influence with the United States," said a strategic planning executive for Saudi Aramco, the state-owned oil monopoly.
Such an outcome would be a triumph for the growing anti-Saudi lobby in Washington, which notes that the country produced Osama bin Laden and 15 of the Sept. 11 hijackers, and whose religious charities have funded a variety of extremist anti-Western groups.
"If Iraq gets a democratic government open to foreign investment, there would be an alternate source of oil supply to (that of) the Saudis, so we wouldn't have to defer to their blackmail, their use of the (oil) revenues that we give them for activities that are very jihadist and dangerous," said Frank Gaffney, a Pentagon adviser and president of the Center for Security Policy, a Washington think tank.
In public declarations, Saudi officials insist they are not worried about Iraqi competition. "We hope there will be enough demand to absorb new production, whether it be from the Caspian or West Africa or Iraq," said Abdulatif Al-Othman, the executive director of Saudi Aramco. "The more the merrier."
But privately, many Saudi officials wring their hands.
"Saudi Aramco doesn't like this, but of course we can't talk about it," said the company's planning executive, who wished to remain anonymous. "Some analysts say Iraq could eventually become No. 1."
Iraq has 113 billion barrels of proven reserves, second only to Saudi Arabia's 262 billion barrels. Iraq's potential remains largely unexplored because of the disruption of the past two decades of war and economic sanctions. The U.S. Energy Department estimates that Iraq has as much as an additional 220 billion barrels in undiscovered reserves, bringing the Iraqi total to the equivalent of 98 years of current U.S. annual oil imports.
FOREIGN OIL COMPANIES
It is widely assumed that U.N. economic sanctions would be quickly lifted after the ouster of the Hussein regime and that the new U.S.-installed government would invite foreign oil companies into Iraq.
"Iraq cannot do without opening to foreign investors," said Fadhil Chalabi, executive director of the Center for Global Energy Studies, a think tank in London.
Chalabi's career includes stints as secretary-general of the Organization of Petroleum Exporting Countries and Iraqi deputy minister of petroleum. He is considered a leading candidate to be installed as czar of Iraq's energy industry in a postwar administration that is certain to be heavily influenced, if not directly run, by the U.S. government.
Chalabi also is a leading proponent of selling off the state-owned Iraqi oil industry to foreign investors. "Without privatization, there is no hope for the oil industry to solve the country's dire economic and social situation, " he said in an interview with The Chronicle.
Chalabi points out that the new government will desperately need quick cash.
The cost of rebuilding the country will be sky-high, as much as $100 billion, according to some estimates.
So far, there's little American public support for spending U.S. tax dollars on Iraq's reconstruction, and it's unlikely that Arab and European nations will foot the bill, as they did in the 1991 Gulf War, particularly if a new war is not backed by another U.N. Security Council resolution.
As a result, analysts say, most of the cost will have to be borne from Iraqi oil revenues.
When added to Iraq's $120 billion foreign debt -- much of it left over from the 1980-88 war against Iran -- the result is a huge burden.
Chalabi estimates that if the best-case scenario holds -- a quick victory by U.S. forces and little damage to the country's oil fields -- Iraq could raise its production from the current level of 2.8 million barrels per day to 7 million barrels per day by 2008. Eventually, he says, Iraqi output will top 10 million barrels per day, more than Saudi Arabia's.
'A LOT OF FANTASY'
But Robert Mabro, director of the Oxford Institute for Energy Studies, cautions that "there is a lot of fantasy going around" about Iraq's oil future.
"It depends on many factors. Will Saddam blow up the oil fields in the first days of the invasion? Will he shoot missiles at Kuwait's oil installations? How much damage will be done during the war, and how long will it last? It's too speculative."
In part because of these uncertainties, accusations that oil is a leading motive behind the Bush administration's drive toward war are wrong, in the view of many analysts.
"If we just wanted to grab Iraq's oil, we would just get rid of the sanctions and do business with Saddam, who would be more than willing to sell his oil to us," said Gaffney. "And if we just wanted cheap oil, we'd invade Venezuela."
What seems more certain is that in the short term, a war with Iraq will cause at least a moderate jump in oil prices -- although less of a jump than expected only a month ago. At that time, Venezuela was paralyzed by anti- government protests that shut down its oil exports, the fifth highest in the world. If Iraq's production had been taken off the world market at the same time as the Venezuela shutdown, prices could have spiked to $50 per barrel or more, driving American gasoline prices well above $2 per gallon.
Now, with Venezuela's production expected to be back near normal next month -- assuming there are no further political disruptions -- the "Iraq effect" will be more moderate, oil experts say, perhaps a rise to $40 per barrel, unless Kuwait's exports are affected.
PRICE WARS
In the long run, as increased Iraqi production enters the market, prices could be driven down as far as the low teens by a price war between Iraq and Saudi Arabia, according to Fareed Mohamedi, chief economist of Petroleum Finance Co., a Washington consulting firm.
"Rather than sticking within their quota and give up their market share to the Iraqis and others, the Saudis are likely to increase production to drive down prices to push other high-cost producers off the market," Mohamedi said.
However, such a price war is likely to result in decreased revenues for the Saudis, which could lead to social instability in a country that has already experienced sharp drops in living standards since the highs of the 1980s, along with increasing levels of joblessness. Unemployment is likely to grow further because of the country's high birth rate and its reliance on low-wage laborers from Pakistan, Bangladesh, India and Yemen.
"An oil price crash would be painful here, no matter how much the government has in foreign assets," said Brad Bourland, chief economist at the Saudi American Bank in Riyadh.
Still, Saudi Arabia may be better positioned to weather an oil price war than almost any oil-producing nation, including Iraq, say energy analysts. Its cost of production is believed to be less than $1 per barrel, and Saudi Aramco enjoys a sterling reputation among buyers worldwide as reliable and quality conscious.
"For those advocating a rapid restructuring of the Iraqi oil sector with massive foreign investment resulting in rapidly growing output levels, the unintended consequences could be much lower oil prices, lower oil revenues for the new government in Baghdad and a host of political problems around the world," said Mohamedi.
Ironically, Saudi Arabia and its neighbors could emerge stronger than ever from "regime change" in Iraq. Many analysts say that because of price wars and dwindling oil reserves in other regions, the Persian Gulf's share of the world's crude oil supply -- currently about 25 percent -- could rise to as much as 40 percent over the next decade.
"For those who see Iraq as a means to lessen dependence on the Saudis, in the end the world might become more dependent on Saudi oil," Mohamedi said. "So much for supply diversity as a policy."
E-mail Robert Collier at rcollier@sfchronicle.com.