Oil bonanza may not flow for US firms
Analysis Even with Saddam Hussein's demise, "oil nationalism" could spark terrorism and sabotage if an occupying US does not strike the right notes, writes Valerie Marcel
Oil is important to America's foreign policy in the Middle East and if the outcome of this war is a stable Iraq, friendly to the US, it could benefit American energy security. But the present US-led military campaign against Iraq is not a war for Iraq's oil.
The previous Gulf War had a clear oil incentive. Protecting Middle East oil from Saddam Hussein's control was an important US objective of the Gulf War of 1990-91. By invading Kuwait, Iraq controlled the production of five million barrels of oil a day, doubling its reserves.
Iraq's own oil is much less important. With sustained investment over several years, Iraqi production could be raised to around 6 per cent of the world total, compared with Saudi potential of nearly three times that and Russian potential of nearly double that.
Oil is important, but if energy security - understood as ensuring a steady flow of cheap oil to the market - was the prime driver for current American foreign policy and war, the US would have intervened in Venezuela to bring an end to the strikes against Chavez's regime. Venezuela accounts for 14 per cent of US imports against Iraq's 7 per cent.
Another public concern is that if the US overthrows the Iraqi regime it will open Iraq's oil to exploitation by US oil companies. So far, American foreign policy has not done very much for the oil majors. US sanctions against Iran and Libya have barred access by American companies to those markets, while European and other companies have had a freer hand to invest in these oil rich countries.
More generally, widespread public resentment against American policy in the Middle East (vis-à-vis both Palestine and Iraq) has made it more difficult for US companies to do business in the region. Some are arguing that by invading Iraq and opening up that market to foreign investment, the Bush administration is finally attending to its friends in Houston, making up for past neglect. American companies will clearly have interesting, new opportunities in Iraq, but that's not the end of the story.
There will be a long wait before long-term investment takes off in Iraq. First, oil companies will not make long-term investments until a legitimate government is fully established. Second, oil nationalism could restrict investment.
During the occupation phase, which could last from six months to two years, many foreign companies will not engage in long-term investments because of the risk that their investments would not survive the US occupation. It would also be politically very risky for the US administration or Iraqi political representatives to propose terms that "give away" future oil. As an occupying force, the US and its allies will face intense scrutiny in their management of the oil sector.
For instance, the US may expect to use Iraq's oil revenues to finance its occupation costs. In this case, the domestic political benefits of minimising American expenses in the Iraq venture must be set against the risks of popular resentment of US neo-colonialism in the region.
The dominant view in the region is that oil is a national resource that belongs to the Arab people. Such oil nationalism could lead to terrorism and sabotage.
To minimise resistance from the Middle East, US-led forces may want to involve the UN in their efforts. They will have to secure a UN mandate to access the oil funds or for UN bodies to participate in the humanitarian and reconstruction effort. The recalcitrant Security Council members could make their support conditional on a truly multilateral involvement in Iraq (thus tying America's hands in the management of the oil sector) and a role for their companies in the reconstruction effort.
Following the disarmament and stabilisation of the country, the US and its allies will want to transfer powers to a transition Iraqi government. This transition phase could last between three and five years. During this slow process of political consolidation, the new Iraqi government will be sensitive to domestic and international pressures.
It will face a difficult dilemma: it will be torn between the need for capital to rebuild the country and its need to safeguard its nationalist credentials by protecting its oil from foreign interests. It is likely Iraqis would rather delay their oil boom than open the door too wide to foreign companies.
They will probably find an intermediate solution, where service companies do contracting work on the existing oil fields and oil companies get short-term Iranian-type contracts. There may be sufficient takers of contracts on these terms to achieve production levels up to around 4 million barrels a day, with the development of one or two new fields of intermediate size or the phased development of large fields.
However, it seems important to question any assumption that a legitimate independent regime would maintain the generous contract terms that Saddam Hussein's regime offered under the pressure of international isolation and embargo.
Although the new regime will be desperate to increase its oil revenues to fund reconstruction, this consideration must be set against its need to safeguard its nationalist credentials by protecting its oil from foreign interests.
Dr Valerie Marcel is a senior energy research fellow at the Royal Institute of International Affairs in London