Iraq could use Alaska oil plan
news-miner.com Article Published: Sunday, May 04, 2003 - 3:00:37 AM AKST By Doug Reynolds
Now that most of the fighting is over in Iraq, the question is how will Iraq's oil industry be set up? In the U.S. we have property rights embedded in our constitution where individuals have the right to own property, including the right to own oil and gas mineral rights and exploit the minerals.
However, a number of oil producing countries, including Kazakstan, Norway, Mexico and Russia, tend toward national ownership of all oil and gas resources. This desire is so universal that Alaska itself is even trying to own a natural gas pipeline, and we already have a constitutionally embedded permanent fund derived from oil revenues.
At this point, we might sit back and think, what is the best way to maximize social welfare with Iraq's oil while still creating national pride? What Iraq really could use right now is a rallying point that will quickly create order and unify its diverse peoples. Oil can do that. If a new Iraqi court system, a new Iraqi legislative branch, and a new Iraqi leader recognize that the oil is for all people in Iraq, then those entities will defend a new constitution more diligently. And the Iraqi people will know, or at least perceive that, their oil can't be taken away by a company, another country, or another dictator.
The real question though is will the Iraqi military swear to uphold a new Iraqi constitution or not. They would be more likely to uphold it and defend it, as well as defend a court system and legislative system that counterweights a powerful executive, if they knew their constitution included some sort of national control of the oil.
Therefore, Iraq could follow a number of models, based on what other countries have done. One possibility is the Mexico model. There the constitution itself mandates that all oil or gas exploration, development and production is nationally owned, even including retail sales. While this model might create a sense of national unity if applied to Iraq, it does tend to create a lot of inefficiencies. For example, the Mexican oil company, Pemex, has more workers than necessary, and exploration and development of new reserves tends to be slow.
Another possibility is to create a national host oil company (HOC) to partner with multinational oil companies (MOC) through joint ventures or other relationships. This would work better. In fact most oil producing countries have HOCs with MOC partnerships including such diverse countries as Norway, Saudi Arabia, and Nigeria. However, it is still hard for the MOC to get its job done because too much time is spent negotiating profit-share agreements with the HOC. Once the MOC finally does invest in infrastructure, the host country could nationalize it. This often creates hesitancy for new investment in oil and gas infrastructure, and again exploration and development is slower than what happens in the U.S. Still, having an HOC is always a great way to create pride in one's country and pull a country together.
One last idea then is based on what we have in Alaska. Alaska has a constitutionally mandated permanent fund, although the earnings from the fund are not constitutionally mandated to be given to the people. Still, the Alaska model could be made workable for Iraq.
For example Iraq could constitutionally mandate that 5 percent of all Iraq's oil revenue (not profits but actual revenue) be divided up and given directly to the Iraqi people. If this is embedded in an Iraqi constitution, the people will feel a national pride in their oil and will want to defend their constitution. They may even eventually want to create more of a property right system in order to maximize their share of the revenues rather than have an Iraqi oil company manage their oil resources.
One plan right now for the current discussions on an Iraqi government might be to bring in oil and gas experts from Norway, Mexico, Venezuela, Kuwait or Kazakstan to help set up the best method for Iraq to control its oil and gas resources.
A constitution that gives control of resources to a government is foreign to American sensibilities, but it is the most typical model for countries around the world and certainly would be more appropriate for Iraq than a U.S. model. As Iraq and the U.S. set up the Iraqi government, maybe putting an Alaska type clause into their new constitution or as a new law might not be a bad idea.
Doug Reynolds is an associate professor of oil and energy economics at the University of Alaska Fairbanks. He can be contacted at ffdbr@uaf.edu.