Oil is a background factor in the Iraqi conflict
It is a common mistake to underestimate the importance of ideology, or political values, in US foreign policy
ANTIWAR demonstrators in the US and Europe wave "No blood for oil" placards. But oil is only a background factor in the conflict. It is true, of course, that if Saddam Hussein were not sitting on 11% of the world's oil reserves and within striking distance of much of the rest, there would be less western concern about him. Questions of long-term supply and price are of vital interest to the western world, but it does not follow that the war is being fought on behalf of "big oil". Notwithstanding the personal connections of senior US politicians to the oil sector, it is oil consumers, not oil producers, that matter. And even they are just one factor in the Iraq conflict.
The Middle East is now more important than ever to the US because it exports terrorism as well as oil. And the US administration's main motive is roughly what it says: to pre-empt the possibility of weapons of mass destruction being used by a man with a proven record of hostility to the US.
It is a common mistake to underestimate the importance of ideology, or political values, in US foreign policy. These factors trumped commercial considerations during the Cold War, when successive US administrations were far stricter in curbing trade with the Soviet Union than the Europeans. In 1978, for instance, Jimmy Carter tightened export controls on the sales of US oil and gas technology to the Soviet Union, in protest against Moscow's treatment of its dissidents. He delayed a $144m contract by Dresser Industries of Texas to sell oil drill-bit technology to the Soviet Union. Carter reacted to the Soviet invasion of Afghanistan by restricting US grain sales to Moscow in 1980.
Ronald Reagan reversed this ban a year later, but then went on to ban any US involvement in building a Soviet gas pipeline to western Europe. This lost Caterpillar of the US a contract that went to Komatsu of Japan. Reagan tried to extend the boycott to European companies but encountered Margaret Thatcher's resistance.
The same pattern has been evident since the Cold War, and the US oil industry has borne much of the commercial brunt. Despite having two former oilmen in the White House the president and vice-president US oil companies have failed to get the administration to relax the ban on their investing in Libya and Iran. The oil lobby proved no match for the proIsrael groups that got US sanctions on Libya and Iran retained. Those sanctions prevent US companies from buying Libyan or Iranian oil.
The situation with Iraqi oil imports into the US is different. It is Iraq that refuses, in theory, to sell oil to the US, except to one Houston trader that it considers friendly.
In fact, Baghdad knows that Iraqi oil reaches the US in large quantities, via middlemen. Last summer there was a move by some congressmen to put Iraq on the same footing as Iran and Libya by banning purchases of its oil too. But the administration argued that denying Iraq the US market would undermine the United Nations (UN) oil-for-food programme, and penalise the Iraqi people. It thus put itself in the odd position of insisting on buying oil from a country it is planning to attack.
Part of the reason for this contortion is that Iraqi oil is popular with US refiners on grounds of quality and price. The US, which is both the world's largest consumer and importer of oil, has an interest in high quality and low price. That interest means that it wants to reduce the power of Opec, the Middle East- dominated producers' cartel that has Iraq as one of its 11 members.
The US has been encouraging non-Opec producers like Russia and countries around the Caspian to increase output and make up for declines in mature oil basins like the North Sea and Alaska.
The big oil reserves are, however, still in the Middle East, which is dominated by Opec. Some in Washington see a chance in a post-Saddam Iraq to weaken Opec further.
What might Saddam do to the oil market if left to his own devices?
"In 1990 the fear was that, having invaded Kuwait, he would head for the eastern province of Saudi Arabia, or at least would intimidate all his neighbours and so dictate Opec policy," says Raad Alkadiri of the PFC Energy consultancy in Washington.
Such speculation was fuelled by Saddam's diatribes against the "throne dwarfs" heading the Gulf state monarchies.
There is no doubt that Saddam would use oil as a political weapon if he could. He tries to do so even in his weakened state. Last April, for example, he stopped all Iraqi exports in protest against Israel's actions in the occupied territories albeit with minimal effect on the oil price.
From the oil industry perspective, the worst scenario would be a strike by Iraq on Ras Tanura, the main Saudi oil-loading port. A more plausible scenario is that, if facing defeat by the US, Saddam might destroy his own oil wells. His army set fire to about 700 wells during its 1991 retreat from Kuwait. To guard against this happening in Iraq, the Pentagon has been planning to take rapid control of Iraq's 1500 oil wells in the event of war.
Assuming that Iraq's oil fields are not destroyed, what will the US want to do with the Iraqi oil industry, if and when it gets hold of it? Colin Powell says: "It will be held in trust for the Iraqi people, to benefit the Iraqi people. That is a legal obligation that the occupying power will have."
Grabbing Iraq's oil for itself would be counterproductive for the US. It would probably raise the oil price and therefore the cost of all other US oil imports. Iraqi production is now about 2,5-million barrels a day, less than a third of the 9-million barrels the US imports daily.
But the US would want to see Iraqi output increased, as would any postSaddam regime in Baghdad. And there is no doubt it can be increased.
Partly due to UN sanctions, which restrict the import of oil equipment, only 24 of Iraq's 73 oil fields are working at present. Removal of sanctions would lead to a scramble by foreign oil companies for licences to start developing new fields. In theory, the companies (notably Lukoil of Russia and China National Petroleum Corporation) that have signed, although not implemented, contracts, and the companies (notably TotalFinaElf of France) that have just conducted preliminary negotiations, would be in pole position to get such licences. But the Iraqi opposition has said that it may nullify all contracts made with the Saddam regime.
Would a pro-US Iraqi government or a US military governor go as far as handing all foreign oil contracts to US companies? It is hard to imagine Washington getting away with such favouritism even if it has fought a war largely on its own. For one thing, it would be difficult to decide whom to favour. BP, for instance, is now the largest oil and gas producer in the US, and its CE, John Browne, has made clear his company should be included in any distribution of Iraqi spoils. For another, it could cause a row with Russia. The Russian government has a major stake in preserving a commercial relationship with Iraq. Iraq still owes Russia an estimated $8bn from the Soviet era, which may be most easily recoverable in the form of oil.
One option being discussed by some people around the Bush administration is privatisation of the Iraqi oil industry. This would go beyond granting foreign oil companies licences to develop new fields and would include selling shares in the state Iraqi National Oil Company, which now pumps all of Iraq's oil. One supporter of this is Fadhil Chalabi, a former Iraqi oil ministry official, now based in London. "Partial privatisation would promote efficiency. But it would be hard to sell politically, because Iraqis feel very nationalist about their oil," he says.
Privatisation, however, could indirectly serve the US goal of weakening Opec. It is most unlikely that even a pro-US puppet regime in Baghdad would take Iraq out of Opec; such a move would be very hard to sell to its own citizens and neighbours. But the more Opec governments invite foreign oil companies in, the more the latter push the former to bust their production quotas. This is happening in three Opec members Nigeria, Algeria and Venezuela (before the current strike) which are all trying to persuade the rest of the cartel that they must have higher relative quotas.
Creating such pressures inside Iraq, through privatisation, might modestly increase world oil supplies and bring down the oil price.
"It might lessen US dependence on Saudi Arabia. And if it were to bring the oil price (now around $30 a barrel) into the teens, then this might force Arab oil-producing governments to open up politically and economically," says Alkadiri.
Underlining, again, that the US game is as much political as it is commercial.
Buchan is former energy correspondent and now editorial writer for the Financial Times. This article first appeared in the March edition of Prospect magazine.
Mar 06 2003 07:16:52:000AM David Buchan Business Day 1st Edition