A war for oil

Mikhail Khodorkovsky tells John Laughland that American control of Iraq will be good for Cadillacs but bad for Russia

Opponents of the impending Anglo-American war against Iraq say that it will push up the oil price and thereby damage the world economy. This is the least of Mikhail Khodorkovsky’s worries. Aged 39, Mr Khodorkovsky, is the chairman and CEO of Yukos Oil, Russia’s second-largest oil company. He is convinced that the medium-term effect of a new Gulf war will be to drive the oil price down to levels which will radically rewrite the map of world oil production, and give the USA total control of supplies. From this, the war for American gas-guzzlers, Khodorkovsky thinks we will all suffer.

Described variously by business magazines as ‘the toughest Siberian shark’ or ‘a Russian bad boy’, Khodorkovsky, a former head of the Moscow Komsomol, is the quintessential Russian oligarch. One of the most powerful men in his country, with gross revenues of over $9 billion a year, he used to support Boris Yeltsin but now apparently has Vladimir Putin’s ear. He is built like a boxer and his flunkeys have the sinister air of night-club bouncers. But when I tell them I have just returned from Iraq, they wince as if a strong electric current had suddenly jolted through their collective testicles. ‘You have touched a very sensitive point,’ says Khodorkovsky, fidgeting but smiling winsomely.

He has good reason to wince. ‘If America decides that the regime in Iraq has to be changed, that is what they will do,’ he tells me bluntly. ‘But the consequences will be very costly.’ Iraq is now the only secular state in the Middle East, he says: if things go wrong, the regime could be replaced by Islamists. Keeping the lid on all this will be very expensive. Like many Russians, Khodorkovsky evidently likes to think that the Americans may bite off more than they can chew when they set about trying to build a crescent of ‘democratic’ Muslim states from Casablanca to Kabul. Perhaps this is a way of finding some psychological solace for the fact that the Russians have decided there is nothing they can do to stop it.

It is more difficult to find solace in the rest of the scenario, however. The present situation in Iraq suits Russia fairly well, says the oligarch. The oil-for-food regime limits the amount of oil that Iraq can pump and this keeps prices high. But this will all change if America installs a puppet regime in Baghdad, or if it obtains control of the Iraqi oilfields by other means. In particular, Khodorkovsky notes that President Bush has failed to make any public commitment to stabilising the oil price after the attack on Iraq, say at around $20-$25 a barrel. ‘When America controls Iraq, Mr Bush will have serious levers in his hands. The temptation to use those levers to push the oil price down is going to be very great indeed: American politics are not known for being geared to the long-term. But if the oil price were to fall to, say, $12 a barrel for two years, all independent oil producers would simply be wiped out. This means Norway, Britain, Canada – and, to a large extent, Russia. America will have very significant costs to recoup, and it will inevitably seek to do this by pumping more oil out of the Gulf.’

Khodorkovsky is, of course, speaking out of self-interest. Russian oil production would be particularly vulnerable to a low oil price because of the specific problems associated with transporting oil over such vast distances: you cannot simply switch off the flow because it clogs up the pipes and the wells, 30 or 40 per cent of which cannot then be switched back on again. ‘With the independent producers knocked out,’ he says, ‘all you will have left is one, maybe two, sources of oil. This really worries me.’ The world would then be completely dependent on a politically very troubled region, the Gulf. Consequently, his fear is that instead of increasing the stability of world oil supplies, an American adventure in Iraq will make the supply of oil more precarious. He also claims that periods of low prices are always followed by price rises, and that such volatility is very bad for consumers.

Our conversation reminded me of a meeting I had had with an Iraqi economist in Baghdad only days previously. Professor Hammam al-Shamaa, a graduate of the University of Montpellier, thinks that the principal reason why the Americans want to attack Iraq is Israel: Iraq has the strongest anti-Zionist policy of any Arab state, and its performance in the Iran-Iraq war shows that it is capable of fighting a long war of attrition. But he also concedes that oil is an important motive. ‘Two years ago, Iraq denominated its oil sales in euros rather than in dollars. It invited the other Arab states to do the same. If they ever did this, a mortal blow would be dealt to the predominance of the dollar.’

Although there is not much chance of this happening, the professor is right to draw attention to the nexus between oil politics and the dollar. The worldwide use of the dollar means that America can print as many dollars as it likes with which to buy imports, without suffering the concomitant inflation. This is because the excess capacity is soaked up by foreigners. In the immortal words of Richard Nixon’s treasury secretary, John Connally, ‘The dollar is our currency but it is your problem.’ There are now some $3,000 billion in circulation around the world, which essentially means that the American economy has become dependent on its ability to buy things with promissory notes.

The USA has not reimbursed these promissory notes with anything since 1971, when on 15 August it unilaterally rescinded its pledge to exchange dollars for gold at $35 an ounce. That decision, which was formalised in 1973, immediately led to the rise in the price of oil in devalued dollars. The ensuing oil crisis in turn caused world growth rates to collapse. Because oil is the lifeblood of the economy, therefore, and because it is denominated in non-redeemable dollars, the Americans have an almost irresistible motive for controlling the supply and price of black gold. Add to that the political gains which would accrue to America from weakening the oil price – namely the destruction of the state budgets of both Russia and the Middle Eastern producers – and you have a cocktail which is not only explosive but also intoxicating. Khodorkovsky’s billions are certainly on the line if America gains control of Iraq; but, if he is to be believed, we will all suffer the consequences too.