The Boston Globe By Daphne Eviatar, 4/13/2003

JUAN PABLO PEREZ ALFONSO, the Venezuelan oil minister and cofounder of OPEC, was onto something. Years ago, even as the price of oil skyrocketed and his country swam in its viscous wealth, he didn't fall for the idea that this was ''black gold.'' ''The devil's excrement,'' he called it. ''We are drowning in the devil's excrement.''

That's not how most people see it today. Watching Iraqis celebrate the end of Saddam Hussein's regime in the devastated streets of Baghdad, many observers may take comfort in the thought that, in the long run, Iraqis will have the resources to rebuild and even prosper. After all, they have all that oil. Last week, White House spokesman Ari Fleischer said, ''Iraq will have a huge financial base from within upon which to draw. And that's because of their oil wealth.''

But having the world's second largest oil reserves doesn't necessarily improve Iraq's long-term prospects. On the contrary, the growing consensus among academics is that oil-rich developing countries are worse off than resource-poor ones. If oil exports account for a significant portion of their economies, studies show, they're likely to develop slowly, repress their people, and suffer from frequent conflict. As economists Jeffrey Sachs and Andrew Warner ask in a well-regarded 1995 study of resource-rich developing countries, ''Is there a curse to easy riches?''

The puzzle of the so-called ''resource curse,'' as Sachs and Warner recognized, dates back centuries. In the 1600s, imperial Spain went into decline despite its gold-rich colonies. In the 19th and 20th centuries, resource-poor Switzerland and Japan sped ahead of oil-rich states like Russia. And the so-called Asian Miracle provides the perfect counter-example today: The barren lands of Korea, Taiwan, and Hong Kong are models of modern development, while Angola, Nigeria, and Congo, soaked in oil, are among the poorest and most conflict-ridden in the world.

Oil has shaped world history since at least the late 19th century. Although Alexander the Great supposedly burned it to frighten his enemies' war elephants, petroleum wasn't routinely employed as an energy source until the mid-1800s, when it was put to use in the kerosene lamp. With the advent of the gasoline-powered internal combustion engine, it went on to fuel the industrial explosion of the 20th century. As Daniel Yergin writes in ''The Prize: The Epic Quest for Oil, Money and Power'' (1992), oil powered the first world war and was critical to the course of the second: The Japanese went after petroleum in the East Indies, while Hitler invaded the Soviet Union in large part to capture the oil fields of the Caucasus. Besides making the suburbs possible, oil-an essential component in chemicals, fertilizers, and plastics-has driven the enormous material progress of the industrialized world. So why, in so many places, has the path of development so often sloped downward?

Historically, the poor fortune of resource-rich countries was attributed to sloth. As the 16th-century French political philosopher Jean Bodin put it: ''Men of a fat and fertile soil are most commonly effeminate and cowards; whereas contrariwise a barren country makes men temperate by necessity, and by consequence careful, vigilant and industrious.''

Academics today offer more complicated explanations. But the gist is that if oil is discovered in a poor country, it's a bit like winning the lottery: just as the laborer might abandon his job, the government makes so much money exporting petroleum that it doesn't develop other industries. Governments then use the windfall to shelter their citizens from the painful process of competition, subsidizing inefficient businesses and expanding government payrolls.

Furthermore, an oil boom compounds the normal difficulties of industrial development because it inflates the local currency, ultimately making it cheaper to import goods than to produce them at home. This chain of events is known among economists as ''Dutch disease,'' a reference to the decline of Dutch industry after the discovery of massive natural gas reserves in the 1960s. A country can sustain itself on easy money for a while, as many did in the 1970s, but skyrocketing prices inevitably drop, as they did in the `80s. And economies collapse. Oil-rich Algeria, for example, booming three decades ago, suffers from 30 percent unemployment today. Saudi Arabia and Venezuela have experienced similar slides.

Although economies based on other re-

sources-say, diamonds or copper-face comparable problems, the trend is most pronounced for oil producers. Stanford political scientist Terry Lynn Karl, in ''The Paradox of Plenty: Oil Booms and Petro-States'' (1997), explains that oil tends to make up a far larger share of a country's exports than other minerals. In Venezuela, for example, oil provides more than 80 percent of export revenue; in Nigeria, it's more than 95 percent. And the oil industry requires even bigger capital investments than the mining industry, while often employing only 1 to 2 percent of the work force. Foreign oil companies, who can afford the investments, control the industry in many countries, and whisk much of the profit abroad. Meanwhile, the money that stays home goes straight to the central government-and often into the pockets of corrupt leaders.

That, in turn, contributes to another common feature of oil-producing states: They tend to be authoritarian, and exceptions to the general rule that higher-income countries are more likely to be democracies. Michael Ross, the UCLA political-science professor who reported this finding in an article in the journal World Politics in 2001, notes several possible reasons. First, an oil-rich government can provide vast social services without taxing the public. ''Because there's no taxation, there's less demand for representation,'' says Ross. These governments also tend to buy off the opposition and amass large internal security forces capable of crushing dissent. Finally, the skewed development of oil-dependent states means they lack the working- and middle-class citizens who have historically been the force pushing for democracy.

Compounding the problem, the slow growth and poverty associated with oil dependence also tends to fuel civil strife, Ross and others have found. This is most obvious in Africa, where the oil-producing states are among the poorest. In Nigeria, oil revenues are at the heart of ongoing civil unrest and widespread government corruption, despite the transition to civilian government in 1999. And in Angola, oil profits (along with the illicit diamond trade) fueled a 27-year civil war that only ended last year after the death of the insurgents' leader.

''Where oil is the main source of wealth, you're inevitably going to have a polarized society,'' warns Michael Klare, director of the Five College Program in Peace and World Security Studies at Hampshire College and author of ''Resource Wars: The New Landscape of Global Conflict'' (2001). ''It could be along class lines, ethnic lines, or regional lines, but whoever controls the state usually also controls oil income, and it's inevitably corrupting.''

Of course, an oil-rich country is not necessarily destined for doom. Consider, for example, the case of Norway. The world's third-largest exporter of oil, Norway has a steady growth rate, almost no poverty, and negligible unemployment. But then, it was already that way when it struck oil in the North Sea in the 1960s. Norway had a diverse economy based on agriculture, forestry, fishing and manufacturing, among other things, and its oil industry has developed amid much planning, bargaining, and public debate. Norway has created an economy that retained its progressive tax structure, re-invested its oil profits throughout the economy, and saved money to cushion future market shocks.

Unfortunately, Iraq couldn't be more different from Norway. During the 1970s oil boom the government created a vast welfare state and invested heavily in industry, infrastructure, and education, but it also poured billions into its military and security forces. Ever since the Iran-Iraq war of the 1980s, the country's infrastructure has been deteriorating, and studies estimate that it would require $40-$60 billion just to restore Iraq's oil facilities to good working order.

Once the tap is turned back on, how should a democratic Iraq manage its oil? After all, the business operates very differently around the world. In the weakest states, many of which are in Africa and Central Asia, and which lack the resources to conduct their own oil exploration, private multinational oil companies run the show. Their favorable contracts with the government, known as production-sharing agreements, give them ownership of the oil in particular fields and control the rules governing exploration and extraction. They are usually exempt from regulations and domestic taxes, instead paying a fixed fee to the government.

But better-off countries won't cede that kind of control. Many countries in Latin America and the Middle East nationalized their oil industries in the 1970s and have been reluctant to invite the multinationals back in. Venezuela, for example, didn't re-open its industry to foreign investments until the mid-1990s. Mexico allows only limited foreign investment, and the major oil-producing states of the Middle East-Saudi Arabia and Kuwait, for instance-have virtually slammed the door. Unfortunately, academic studies so far have not considered the long-term economic or political effects of these different arrangements. Michael Ross says the World Bank has repeatedly refused to fund his proposed studies on the subject.

Whatever roles the United States and the United Nations play in the reconstruction of Iraq, there's no question that foreign investment will be allowed. Once a new Iraq government takes power, there are some steps it could take to improve the likelihood that oil will help rather than hinder democracy and development.

First, it can make sure all contracts between a new Iraqi authority and private oil companies be made public, including all oil company payments to the government. That would go a long way toward reducing government corruption and encouraging public participation in decisions on how to spend oil revenues. The government could also create an independently monitored oil fund that collects oil profits and invests them in the creation of national infrastructure and broad-based economic development. It could also establish a trust fund, modeled on Norway's, that invests some of its oil income abroad to provide for the country during the inevitable market downturns.

Experts stress that there's nothing inevitable about the ''resource curse.'' Graham Davis, an economics professor at the Colorado School of Mines, who's been debating the theory for years, insists that ''there's no pattern we can rely upon to say a country that has oil therefore will not be democratic or will not develop adequately,'' he says. ''It's a trend. It's not a rule. One has to look at the kind of legal and economic institutions that are set up to serve the country. If they're bad ones-with lack of transparency, lack of judicial oversight-then the oil tends to be put to bad use.''

President Bush is optimistic. ''The nation of Iraq, with its proud heritage, abundant resources, and skilled and educated people, is fully capable of moving toward democracy and living in freedom,'' he said in February. That's certainly what most observers are hoping for. But for a new Iraqi government, it will be no small task. Iraq will need to defy the weight of not only its own history, but that of every other oil-producing nation in the developing world.

Black gold, or resource curse?

Top oil producers, as a percentage of world total Saudi Arabia 11.8 United States 9.9 Russia 9.7 Iran 5.2 Mexico 5.0 Venezuela 4.8 China 4.6 Norway 4.5 Rest of the world 44.5

Source: International Energy Agency, 2001

Oil exports, as a percentage of total merchandise exports Nigeria 99.6 Algeria 97.2 Saudi Arabia 92.1 Iran 88.5 Venezuela 86.1 Norway 63.9 Russia 51.0 Mexico 9.7 United States 1.9

Source: World Bank, 2000

Daphne Eviatar is a Brooklyn-based writer and contributing editor at The American Lawyer

For comments and suggestions, email ideas@globe.com

This story ran on page E1 of the Boston Globe on 4/13/2003.

<a href= www.japantoday.com>japantoday - commentary Maher Chmaytelli

As U.S. forces besiege Baghdad, Iraq's 112 billion barrels of proven petroleum reserves are firing the imagination of oil majors, but experts say the road to Mesopotamia's riches is paved with many obstacles.

"To invest in Iraq, international oil companies (IOCs) need first reasonable security," said Ruba Husari, from New York's Energy Intelligence Group (EIG).

"Second," she added, "they need a legitimate government who would guarantee the long-term contracts, and thirdly attractive terms" — as those deals involve billion of dollars.

"It is too early to tell if the United States will manage to stabilise Iraq in the long term, even with U.N. help," said Naji Abi Aad, managing partner of Beirut-based consultant Econergy.

"To win the war is sometime easier than to win the peace", he added, referring to Iraq's complex ethnic and religious structure, its history of bloodshed and a long string of coups and coup attempts in the past 50 years.

Figures published in different studies on Iraq's reconstruction put the investment needed to bring production capacity back to pre-1991 Gulf war level of 3.5 million barrels per day (bpd) in the range of three to five billion dollars.

This level, higher than current capacity by some one million bpd, could be achieved in two years. Another $30-40 billion will be needed to boost capacity to between six and eight million bpd, six to eight years from now.

Iraqi oil experts in exile and U.S. officials agreed Saturday during a meeting in London on the need for IOCs to rehabilitate and develop the oil sector, devastated by three wars in two decades and by 12 years of U.N. sanctions, as Iraq lacks the technical and financial means.

Iraqi delegates at the meeting said foreign participation would probably be sought under production sharing agreements (PSAs) that allows IOCs to be reimbursed with part of the oilfields' output for the duration of the contract.

This would not be really new in Iraq, as Saddam Hussein's government provisionally awarded six PSAs to foreign firms in the 1990s, with the obvious aim of enlisting their government's help in lifting the sanctions.

The gushers went to France's TotalFinaElf and Russian companies, while British-Dutch major Shell was frontrunner in a main field under tender, and a string of contracts were under negotiations with a variety of European, Canadian, Australian, Asian and Arab firms.

But these contracts could not be implemented because of U.N. sanctions, and U.S. companies were kept at bay.

The situation is set to change, since Saddam's removal would pave the way for the lifting of the U.N. sanctions, unlocking Iraq's reserves, the second largest in the world after Saudi Arabia.

And U.S. majors could also claim a role commensurate with their country's contribution to the war.

"A big question hangs over the fate of the contracts already signed" under Saddam Hussein, said EIG's Husari.

"These are likely to be re-examined case by case. They might not be annulled but open to other new partners, especially where the firms that signed are not considered to have the required financial or technical capability," she added.

"Politics will always play a role in the awarding of contracts, just as it had under Saddam Hussein or even in other countries in the region," she said.

BP was the first company to raise the issue, as early as last October.

"We would like to make sure if Iraq changes regime that there should be a level playing field for the selection of oil companies to go in there if they're needed to do the work there," said BP chief executive John Browne.

And he recalled that it was BP's ancestor, the Anglo-Persian Oil Company, that made the first oil discoveries in Iraq, in the early 20th century.

But Abi Aad said that a democratically-elected government in Iraq might not necessarily play the oil game as sought by U.S. and British majors.

"See Kuwait: the United States liberated it 12 years ago and it hasn't yet opened up upstream oil to foreign companies. See Venezuela: democracy did not bring in a friend of Washington," he said.

He also mentioned the nationalist sentiment that prevails in the oil sector of Iraq which "prides itself with being the first country to have nationalized its petroleum wealth," in 1972.

The OPEC oil cartel, occasionally the nightmare of oil-consuming nations, was created in Baghdad in 1960, eight years before Saddam's pan-Arab Baath party came to power. (Middle East Online)

By Globe Wire Services, 4/11/2003

NEW YORK -- US oil prices dropped nearly 5 percent yesterday as Kurdish fighters took control of the oil city of Kirkuk in northern Iraq a day after the fall of Baghdad, easing fears of damage to Iraqi oil fields.

Dealers said that expectations of a flood of oil from OPEC members in the coming weeks, combined with rising production from Nigeria following disruptions caused by ethnic violence, were also weighing on the market.

''Short-term the market is already bearish because OPEC supplies will build stocks. The news from Kirkuk adds to that sentiment,'' said Geoff Pyne, consultant to Sempra Energy.

US light crude oil on the New York Mercantile Exchange fell $1.39, or 4.8 percent, to $27.46 a barrel. London Brent blend crude oil eased 75 cents to $24.50 a barrel.

Kurdish guerrillas captured Kirkuk, the hub for Iraq's northern oilfields that pump 40 percent of the nation's crude, after government troops gave it up virtually without a fight.

The United States said it plans shortly to take control of the city from the Kurdish fighters, Washington's allies in northern Iraq. In Iraq's southern oilfields the US military said it aimed to restart production in less than an initial estimate of three months.

''We are hoping to pump about 200,000 bpd to 800,000 bpd. Our initial assessment was that it would take 12-15 weeks before we could expect to see any oil flowing,'' said Colonel Michael Morrow.

''We'll probably take less time than that,'' he said, adding that the US Army Corps of Engineers would attempt to speed up the process with the help of Iraqi oil workers.

A decision on the timing of a resumption in exports will not be taken until interim authorities are installed.

Also weighing on prices was a report yesterday from the International Energy Agency that said OPEC should think twice about cutting production to boost sagging oil prices because supplies remain short and the immediate outlook remains cloudy. The Paris-based IEA, which represents the world's wealthiest countries, said stocks were low in member nations, and there were doubts about the export situations in Iraq, Nigeria, and Venezuela.

''Significant production curbs . . . may impact upon the industry's ability to rebuild stocks,'' the report said.

But OPEC's president, Abdullah Hamad bin al-Attiyah of Qatar, said yesterday in Paris that the world's oil markets are glutted, and the resumption of Iraqi oil production could make that worse.

Al-Attiyah said the current crude oil excess totals more than 2 million barrels a day.

OPEC officials said Monday that oil ministers planned to meet April 24 in Vienna whether or not the war in Iraq has ended.

twincities.com

OPEC should think twice about cutting production to boost sagging oil prices because supplies remain short and the immediate outlook remains cloudy, the International Energy Agency said Thursday. Most OPEC members have been producing at maximum capacity to keep supplies plentiful during the war. However, oil ministers fear OPEC might be oversupplying the market just as demand starts falling to its seasonal low. The Paris-based IEA, which represents the world's wealthiest countries, said stocks were low in member nations, and there were doubts about the export situations in Iraq, Nigeria and Venezuela.

Financial Review network Apr 8 Chip Cummins, The Wall Street Journal

US army engineers, offering the most authoritative assessment yet of Iraq's huge southern oilfields, said a resumption of petroleum exports is months away, further damping hopes of a quick return of Iraqi crude to world markets.

According to Brigadier-General Robert Crear, commander of the South-Western Division of the Army Corps of Engineers, a lack of replacement parts for infrastructure in the fields might also crimp initial output once production resumes.

The US effort has been further hampered by the unwillingness of Iraqi oil workers and managers to return to the job amid continued fighting in the south.

"We don't know how much it's going to cost and how long it's going to take" to bring exports from southern Iraq back on line, he said. "It'll be months, but I can't tell you how many."

Last week, a British commander in charge of UK forces in the region estimated it would take about three months and $US1 billion ($1.6 billion) to restart exports from Iraq's massive southern fields, now largely held by US and British forces.

That estimate surprised some oil-industry analysts who had been expecting exports to resume within weeks, since damage to the fields appears minimal.

Meanwhile, the US is moving to recruit senior executives to help run Iraq's oil industry after the war. Phillip Carroll, the former chief executive of Shell Oil, the US operation of Royal Dutch/Shell Group, would lead Iraq's national oil company, sources said.

It is not clear whether Mr Carroll, who retired last year as CEO of Fluor, would formally head the Iraqi company or exercise control by heading an advisory body in charge of Iraqi petroleum in a postwar transition period.

One industry official said the US was also considering an Iraqi-American to oversee Iraq's State Oil Marketing Organisation, which is in charge of exports.

The official also said Rodney Chase, deputy CEO of BP plc, was being considered as a deputy to whoever runs SOMO. Mr Chase, due to retire from BP this month, could not be reached for comment. A BP spokesman declined to comment.

While the overall US plan for running Iraq's oil industry isn't known yet, it is becoming clear that Washington is seeking to recruit top executives from the largest global oil companies on both sides of the Atlantic. Their expertise could bode well for the resurrection of the Iraqi oil industry, which was nationalised in the 1970s and has been badly hit by war and sanctions.

The resumption of Iraqi exports is crucial for global oil markets, which have tightened in recent months.

A strike in Venezuela hobbled exports from that big oil producer for months, while a colder-than-normal winter across the northern hemisphere helped erode stocks of inventory in big consumer countries, particularly the US. More recently, political violence in Nigeria has sent major oil companies fleeing the region and shutting down oil production there.

Retreating Iraqi soldiers appear to have torched just nine wells in the oil-rich south. All but two of the Iraqi fires have been extinguished.