THE POST-WAR OIL SHAKEUP
Source By NICOLE GELINAS
March 24, 2003 -- FOUR nations absent from our long list of allies in Operation Iraqi Freedom are also those whose leaders stand to lose the most when Iraq's oil fields are liberated along with its citizens.
Saudi Arabia, Russia, Venezuela, Mexico - each thrives on the permanent chaos of the crude oil market. Competition from a democratic Iraq will force the oil-exporting governments of these nations to find new ways to make money.
Saddam Hussein and 24 years of tyranny in Iraq have served as a buffer between stagnant oil states and the fluid free markets. Since Saddam came to power, new discoveries have increased the estimate of Iraq's untapped oil fourfold to represent 11 percent of world crude reserves, second only to Saudi Arabia.
But Saddam's Iraq has done little to increase oil production. The government hasn't even performed much routine maintenance on its oil wells since 1979.
A free Iraq infused with new dollars and pounds could double its oil production in less than five years to rival the export capacity of Saudi Arabia and Russia.
The prospect of regime change in Iraq, now nearly realized, will be a shock to the energy world that will rival the shock caused by the original formation of OPEC, Cambridge Energy Research Associates analysts said two weeks before the war began. Other energy analysts are now slashing the average crude price outlook for 2003 from $30 a barrel to below $20 and falling.
Stable, moderate oil prices fostered by an OPEC-weaned, free-market Iraq with economic interests aligned with those of the western world will force the world's oil exporters to implement massive political and economic reforms at home.
Saudi Arabia stands to lose the most from a freed Iraq. OPEC aside, Saudi Arabia has always belonged to a club of one - the nation owns a full quarter of the world's discovered oil reserves. The Saudis rely almost exclusively on $55 billion in annual crude oil exports to maintain their welfare state, but still come up short - the country's budget deficit is equal to its annual GDP.
Saudi Arabia must export eight million barrels a day at a price of $22 per barrel to fund its bloated budget. With an efficient Iraq producing more oil, Saudi Arabia could no longer cut its own production to keep prices high. The Saudis would have to cut back severely to keep prices in line - and they can't do that because they need the money.
Lower prices would force the Saudi royals to look for the first time to their own repressed people as a potential wealth-producing natural resource.
Russian president Vladimir Putin morphed into an instant pacifist when President Bush asked him to support the war against Saddam. The reason why is no great mystery - a free Iraq vying for international investment will pose a direct threat to Russia's economy.
Russia still derives 40 percent of its export revenues from oil sales, but Russian oil production is just two-thirds what it was during the Soviet days. Russia is depleting its reserves faster than it can bring new wells on line.
Russia has implemented cosmetic political and economic reforms to attract global capital. But its oil industry is still crippled by an ever-changing corporate tax structure and persistent financial opacity.
Russia attracts foreign investment only because the U.S. government's Export-Import Bank has been willing to guarantee commercial bank lending to Russia's oil industry as part of our mandate to diversify our oil supplies.
But with the support of a democratic Iraq, the U.S. would have little incentive to back risky investment in Russia. Without a government guarantee to back capital, "anyone who does business in Russia is insane," the head of one oil investment team at a U.S. bank told me recently.
Rational oil prices will also jump-start stagnant economies in the Americas. The governments of Venezuela and Mexico derive one-half and one-third of tax revenues respectively from oil exports; neither will lend its name to the Coalition of the Willing.
Like Saudi Arabia, Venezuela and Mexico depend on persistently high oil prices to fund their federal budgets. Low prices would force governments in both nations to invest in the talents of their citizens to diversify the tax base.
With a freed Iraq competing against it for investment, Venezuela, especially, will be forced to evolve. Oil companies and banks invested more than $5 billion over the past five years in Venezuelan crude projects only to lose 30 cents on the dollar to political crises.
Asset values in Venezuela have plummeted as President Hugo Chavez re-wrote Venezuela's constitution and imposed new limits on the ownership rights of foreign oil companies. International oil companies in Venezuela could only watch this year as striking oilworkers cut crude exports to nil.
Banks and oil companies with a new venue for their investment dollars will leave Venezuela if Chavez won't.
When the war is over, the U.S. and Britain will surely face pressure from the Saudis and others with a vested interest in the status quo to leave Iraq something short of a true democracy. Sensitive to the charge that we fought a war for oil, we may be tempted to allow Iraq to remain an enabler to the black box of the current crude market.
But stunted governments who use oil as a crutch go beyond using their exports to keep their own people facing backward. Their dysfunction stalls the global economy.
Oil hasn't changed in 150 years. Yet price controls imposed by colluding oil producers keep the economies of forward-looking nations like the U.S. and Britain in a state of co-dependency on the budgetary needs of oppressive leaders who are accountable to no one, least of all their own citizens.
A $10-per-barrel price drop is the equivalent of an immediate $40-50 billion tax cut to the U.S. economy, oil historian Daniel Yergin said recently. That level of economic stimulus would benefit all the world's citizens - including those who have been held down by their oil-rich governments long enough.
Nicole Gelinas covers the oil and gas industry for a British magazine.