Thu, 04 Dec 2003

Bush administration: The war for oil

A. F. Alhajji, Professor of Business, College of Business Administration, Ohio Northern University, Project Syndicate

For decades, through Democratic and Republican presidential administrations, America has pursued a set of straightforward energy policy objectives: Keep world oil prices as stable as possible; reduce domestic consumption of oil as painlessly as possible; reduce dependence on foreign imports whenever possible; and diversify the sources of imported oil. Despite appearances, none of these objectives has changed under the Bush administration.

Many observers believe that Bush has set a new course because the invasion of Iraq seems to fly in the face of these objectives. A big increase in Iraq's oil production would probably increase U.S. dependence on oil relative to other energy sources, as world oil prices will probably fall in response to the additional supplies. This, in turn, would mean an increase in U.S. dependence on imported oil, especially from the Middle East.

The irony, however, is that the U.S. exercised greater control over the Iraqi oil sector under the UN's pre-war "Oil-for-Food Program" (in which the UN, not Saddam Hussein, determined the level of Iraqi oil sales abroad) than it will in any future democratic Iraq. If the Bush administration was seeking stable, secure, diverse and cheap oil supplies, it could have simply lifted the embargoes on Libya, Iran, Iraq, and Sudan and let the oil gush.

But America's interest in Iraqi oil was not driven either by economics or energy policy. The Bush administration recognized that, above all, Iraqi oil is a critical geopolitical asset. Whoever controls Iraqi oil controls Iraq.

Saddam's power came from his control of the world's second largest oil reserve. He understood perfectly the role that oil played in his power. Faced with the possibility of invasion and defeat, Saddam threatened to burn Iraq's oil fields. Much of the subsequent destruction and looting of Iraqi oil facilities and pipelines reflects the widespread realization that control of oil means control of Iraq.

As the U.S. planned its invasion, securing the oil fields became a critical priority. The goal was not increased supplies or reduced prices for Americans, but stripping Saddam of his power and, ultimately, establishing and solidifying a new Iraqi government.

Iraq's future depends directly on the fate of Iraqi oil production. Yet the vagaries of the oil business, particularly in such unsettled conditions, make it hard to see how the Bush administration will be able to achieve its goals in Iraq within the next few years.

The logic is simple. The U.S. must use oil revenues to lift the burden of financing regime change in Iraq from American taxpayers. All reconstruction plans depend in the long run on the ability of Iraq to export oil in large quantities. If Iraq does not deliver its oil, President Bush cannot deliver on his promises to the Iraqi people, the American people, or the world community.

Before the invasion, Iraq's oil production capacity reached three million barrels per day. Iraq will not be able to increase its production to that level within the time frame needed to establish an Iraqi government. Any increase in Iraqi oil production requires developing the oil fields, which means big investments, a legal and representative government, and political stability. Not even the Bush administration expects these requirements to be met soon.

Indeed, political stability is the main condition for increasing production capacity. Historical evidence from Iran, Kuwait, Russia, and even Iraq itself, indicates that it takes about three years from the re-establishment of political stability for capacity to increase significantly and for those new higher levels to be sustained.

Iraq needs several years to write a new constitution, establish a legitimate and democratic government, negotiate the distribution of oil revenues among its various regions, enact new investment laws, and make the economy attractive to foreigners. It also needs time to negotiate with the international oil companies and neighboring countries, to perform technical and feasibility studies, and to reconstruct, rehabilitate, and explore its oil fields.

So even a three-year time frame seems optimistic, for it assumes that within that period, the occupation will end, Iraqis will establish their own democratic government, and that political stability will be achieved.

Needless to say, the situation may play out differently. Tensions may remain high for years. No one should be surprised, moreover, if Iraqi oil production suddenly stops altogether even under a democratic government. History suggests that labor strikes and similar disruptions that can halt oil production are a greater threat in democratic than in undemocratic countries.

If Iraq cannot quickly increase its production capacity in the next few years, this will hinder both U.S. foreign and energy policies. How will the U.S. finance the long-term reconstruction of Iraq? Who will pay to maintain a fragile Iraqi democracy? Can the U.S. sustain its occupation if it cannot provide food, health care, and other basic services to Iraq's people? These are tough questions, and they are fundamentally unanswerable until a stable, democratic regime in Iraq can control and ensure a steady flow of oil exports.