Can A Post-war Iraq End Opec Manipulations?
<a href=www.financialexpress.com>Read Source. Shebonti Ray Dadwal
Will securing Iraq’s 112 billion barrels of oil reserves resolve the industrialised world’s and the US’ energy problem? Can a pro-west, perhaps even a democratic Iraq provide Washington with the alternative it has been seeking to replace Saudi Arabia as the linchpin of its Gulf and energy policy and, more importantly, lead to the end of an increasingly troublesome OPEC (Organisation of Petroleum Exporting Countries)?
Whether George W Bush’s leitmotif for a second Gulf War is oil or not, or whether his objectives are more ambitious vis-a-vis the entire Gulf region, there are many who are ready to believe they are. The elaborate plans that were made to ensure that Iraq’s precious oil fields were secured, both during the war and after, for the US oil companies, add grist to the rumour mill. In fact, it is even said that a certain American oil company has already been given a post-war reconstruction contract. And, after all, wasn’t the first Gulf War all about not allowing the Iraqi dictator wresting control over Kuwait’s oil and gaining access to the world’s largest reserves?
But that was a different era, when Riyadh was Washington’s most trusted ally and could be depended on to use its ability as a swing producer to keep oil prices at acceptable levels — not too high as to increase inflationary trends and impact on the global economy, yet not too low as to affect the profit margins of the producers, including the American companies.
Of course, the relationship worked both ways. The Saudis always knew that with their incredibly low cost of production and reserves close to 262 billion barrels, they could capture market share by jacking up production over and above their OPEC quota levels and flood the market with crude at prices which would render the high cost non-OPEC producers — which included the American producers — unviable. Besides, it suited Saudi Arabia, whose main source of revenue continues to remain rooted in its energy sector, to keep the world hooked on a diet of oil.
Then 9/11 happened and Washington’s greatest fears regarding Saudi reliability were confirmed. Signs of anti-Americanism that had begun to take root soon after the first Gulf war, were by and large, ignored as long as the regime was seen as loyal and Riyadh controlled and manipulated the spigots to keep renegade OPEC members, who were advocating production drawbacks to keep prices high, in line. But with evidence of some linkages between the Saudi regime and Islamic terrorist funding, Washington was ready to look for alternative allies.
Besides, Riyadh’s ability — and interest — to halt rising oil prices were also being questioned. When prices increased by 40% in a little under a year to reach $36 a barrel in January this year, a Saudi-engineered Opec production hike was instituted. But with rampant quota busting already ensuring that most cartel members were already producing to capacity, a ceiling hike only legitimised clandestine output. And with a strike in Venezuela all but wiping out that country’s 2.5 mbd exports, and tight US inventories, even a Saudi production hike could not bring about a price drop.
For a while, Moscow presented itself as a possible partner, as it not only had large energy reserves but was also a useful ally in facilitating Central Asian energy exports to the world market. With American investments pouring into the Russian oil sector, production was revved up to more than 7.5 mbd from an earlier below 6 mbd. However, Russia’s oil reserves, at 48 billion barrels, constitute only a small portion of global reserves; also, its cost of production is high and it is already pumping oil to capacity.
That leaves Iraq. With its vast oil wealth and twice as much potential reserves, plus its incredibly low cost of production, it could, if brought out of Opec, allow the world to be delivered from its price manipulations, perhaps even render the cartel ineffective. However, for this to happen, Iraq’s oil wells, already crippled by more than a decade of UN-imposed sanctions, and now perhaps by Saddam Hussein’s retreating troops, will first have to be brought back on line if a prospective oil shock is to be staved off. With US oil inventories at an all-time low, political problems in Nigeria affecting exports, and Venezuela yet to regain pre-strike production levels, the world may well have to see the International Energy Agency forced to release strategic stocks to prevent another crippling oil price hike.