Simon Nixon

It’s not the oil, stupid

Conspiracy theorists should lighten up, says Simon Nixon. The US is not about to use Iraq's fuel reserves to dominate the world

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These are tough times to be a Middle Eastern despot, so perhaps it is understandable if a few of them feel a little paranoid right now. Iraq is under foreign occupation, Iran is in open revolt, and Saudi Arabia is apparently under attack from British bootleggers who look surprisingly like friends of Osama bin Laden. Under the circumstances, even the most pampered autocrat might be forgiven for feeling a little anxious. But what is really troubling many in the Arab world is not so much the threat of internal opposition – they have ways of dealing with that – but fear of America, and specifically fear of what America plans to do with Iraq's oil. Few in the Middle East are in any doubt about what America has in mind: it wants to use Iraqi oil as a stick with which to beat recalcitrant Arab regimes and as a means of undermining Opec.

The theory runs something like this: the gas-guzzling US economy cannot operate without a steady supply of reasonably priced oil. Since American domestic production is dwindling, it must increasingly rely on imports, including from Middle Eastern countries such as Saudi Arabia, a country that the US regards as unstable and which could even turn hostile. But now the US controls Iraq, it need no longer kowtow to the oil-producers' cartel, Opec. Instead, it will force the Iraqi government to withdraw from Opec and ramp up production to Saudi levels. As a result, the world will be awash with cheap oil and the ailing US economy will receive an almighty boost. Moreover, America will have turned the tables on the Arab world and other leading oil producers such as Russia, which will suddenly find their own economies at the mercy of the US.

British and European antiwar protesters will be familiar with these arguments. As 100,000 placards testified, they never believed the war was about anything other than oil. Little that has happened since will have changed their minds. During the fall of Baghdad, did not US troops rush first to protect the Iraqi oil ministry, even as hospitals and museums were being looted? Was not one of the first appointments made by the US administration in Iraq that of Phil Carroll, a former managing director of Shell in North America, to 'advise' the Iraqi oil ministry? Did the US government not award a lucrative contract to Halliburton, a US oil-services firm with close links to the administration, even before the conflict was over? More to the point, did vice-president Dick Cheney not explicitly state in a report two years ago that diversification of oil supplies was an urgent matter of national security?

What is more, the conspiracy theorists can point to any number of Americans who believe that using Iraqi oil as a stick to beat up Opec is precisely what the US should be doing. Leaving Iraqi oil in the hands of a state-owned monopoly subject to Opec quotas would be the worst possible outcome, says Danielle Pletka of the American Enterprise Institute, a right-wing think-tank with close links to the Bush administration. State ownership of the oil industry has done nothing for the people of the Middle East or anywhere else in Opec. It has concentrated huge wealth in the hands of a very few, much of which has been frittered away on armaments. Opec states have singularly failed to invest in other industries, and many of their people are worse off than they were 30 years ago. It would be 'disastrous', says Pletka, if America didn't take this opportunity to reshape the Iraqi oil industry and thereby provide a blueprint for the rest of the Middle East.

But fortunately or unfortunately, depending on your point of view, the hopes and fears of this strange alliance of Middle Eastern conspiracy theorists, left-wing European peaceniks and right-wing American ideologues are some way wide of the mark. The truth is that Iraq is unlikely to be in a position to disrupt Opec for at least a decade – and even then, it is not at all clear that it will be in either its own or America's interests to undermine the cartel.

The first point to bear in mind is that two decades of war and sanctions have left the Iraqi oil industry in a truly dreadful state. Even since the war ended, the infrastructure has been so badly looted that just getting production back to the 2.5 million barrels per day (b/d) could take many months, reckons Leo Drollas of the Centre for Global Energy Studies. Offices have been ransacked, company cars stolen, communications systems destroyed, toolboxes looted and pipelines damaged. Those who have the means to get to work are scared to do so, and few are willing or able to visit remote fields and substations to carry out essential repair work.

Besides, restoring production to prewar levels is only the first step. The next challenge is to boost output to 3.5 million b/d, its pre-first Gulf war level. But this will take at least two to three more years and will require at least $2 billion of investment, says Drollas. To increase production beyond this level, to a possible 6 million or 8 million b/d, will cost a further $20 billion and take ten to 15 years. It will mean developing new fields first discovered in the 1970s that have yet to be exploited. But an enormous number of obstacles – political, legal, financial – need to be overcome before that investment can start. A new Iraqi government must first decide how it wants to organise the oil industry and then put in place the appropriate legal framework.

On the other hand, there is no doubt that Iraq is theoretically capable of producing up to 9 million b/d one day. According to the BP World Oil Review, with 112 billion barrels, Iraq has the second-largest oil reserves in the Middle East after Saudi Arabia. Moreover, this is almost certainly an underestimate since hardly any exploration has taken place in Iraq since the 1970s. But will a new Iraqi government want to ramp up production to that level if that would put it on a collision course with the rest of Opec?

That seems unlikely. The priority for any new Iraqi government is bound to be maximising oil revenues to pay for reconstruction. In anything other than the very short term, this will mean accepting the disciplines of the Opec quota system in return for a higher price, rather than triggering a price war that would leave everybody worse off. As things stand, any production above about 3.5 million b/d – equivalent to Iraqi's old quota of 14 per cent of Opec's current production target – would cause problems for the cartel, so it is possible that some renegotiation will take place. But few in Opec doubt that, left to its own devices, Iraq will decide to stay within Opec. That almost inevitably means retaining state control of the oil industry, whatever the disappointment that may cause Iraq's American liberators.

But will America therefore try to impose a free-market solution on any new Iraqi government, as many conspiracy theorists suppose? It is becoming increasingly hard to see how it could. Even the most fervent supporters of the invasion admit that America is rapidly losing control of the situation on the ground – and with it any legitimacy to dictate the nature and policies of a future independent government. More to the point, it is not at all clear that it is in America's interests that Iraq should leave Opec. Jerry Taylor, director of Natural Resource Studies at the Cato Institute, another right-wing US think-tank, would love to see the Iraqi oil industry privatised and pumping oil 'hell for leather'. But he doesn't believe it will happen. Opec is in the political interests of the US, he says, which is why successive US governments – Republican and Democrat – have been intervening to support Opec for decades.

The first President Bush helped broker a deal restoring the quota system after Saudi Arabia triggered a price war in the mid-1980s. There is no reaso n to expect his son to act any differently. Not only has Opec's price-fixing helped promote global energy security, making exploration and production in other higher-cost parts of the world, such as the Caspian and Africa, economic but, more importantly, without Opec, the oil price would soon fall below $10 a barrel, rendering uneconomic most US domestic production and causing meltdown in the Bush political heartland of Texas.

The truth is that Iraq is the least of Opec's problems. Even if Iraq does start pumping out 6 million barrels a day by the middle of the next decade, the extra production would only be the equivalent to the expected increase in demand from China. In the meantime, the threat to Opec is from non-Opec producers such as Russia, Norway and Canada. The problem is that global production capacity is rising and growth in demand is slowing. The International Energy Agency has cut its estimate of global demand growth from 2 million b/d to 1 million for the rest of the decade, citing weak economic conditions, increased energy conservation and the switch to alternative fuels. Opec's share of the world market is falling. At some point, this may trigger a crisis in Opec. But it won't be Iraq that is to blame.

In the meantime, the rest of us should take comfort from the fact that the global oil market has emerged unscathed from a major challenge. The Iraq war took place against a background of strikes in Venezuela and a major stoppage in Nigeria. Yet the oil price did not soar above $50, as many feared. The system worked. Nobody went without supplies. The lights didn't go out and the traffic didn't grind to a halt. The world carried on about its business. This should give us all comfort as we eye nervously events among Iraq's neighbours, Iran and Saudi Arabia. Middle Eastern despots can come and go, but the oil market will carry on regardless.