Wednesday, November 30, 2005

Is Oil Blocking Iraq's Exits?

Considering the degree to which the US-led invasion of Iraq was linked by so many of its critics to petroleum, it is remarkable that the commodity has hardly been mentioned in the debate over an exit strategy. If anything, concerns about linkage would be much more appropriate now than they were in 2003. Whatever factors one believes took us into Iraq, leaving prematurely could have grave consequences for the global petroleum supply and demand balance, with potential price spikes at least as large as those associated with the summer's hurricanes.

Far from providing an opportunity for the US to seize the country's 100 billion barrels of oil reserves and operate them as our own "filling station", as some had speculated, war was the second-worst thing that could have happened to the Iraqi oil industry, behind the continuation of the slow death it was suffering under sanctions and the UN Oil-for-Food program. The best oil scenario would have required a declaration that Iraq was free of WMD, followed by normalized relations and the termination of sanctions. That's the scenario that a number of French, Russian, and other non-US companies were banking on before the war, as they busily negotiated contingent deals to develop Iraq's reserves.

In the two-and-a-half years following the invasion, Iraqi production has fluctuated in the unequal competition between terrorists and engineers. It is still producing just under 2 million barrels per day, a bit less than before the war, but that 2 MBD is a lot more valuable and much less optional now than it was then. When the US invaded Iraq in March 2003, the price of oil stood at $30, and supplies were starting to recover from the lengthy oil industry strike in Venezuela. Now, after a couple of years of feverish demand growth in Asia and a long series of production glitches, including Katrina and Rita, any serious disruption of Iraq's output would send prices back over $70, and possibly well beyond.

What does this have to do with US troop withdrawals, since most of the oil-field, pipeline and refinery security is in Iraqi hands? It's all a question of conditions after the US leaves. Conspiracy theories notwithstanding, the oil industry thrives on political stability, particularly when investments in the billions of dollars are involved. Only a stable, secure Iraq, ruled by laws and not fatwas, will provide an environment suitable for the investments needed to maintain and expand production. And in the event of a full-blown civil war--a very real possibility after a precipitous US pullout--damage or disruption to the oil facilities would be a virtual certainty, especially in the northern oil fields around Kirkuk that are claimed by the Kurds and the Sunnis.

I firmly believe that oil was not our primary motivatation for going into Iraq, nor should it be the main consideration in determining the timetable for a US military "redeployment." However, ignoring the security of Iraqi oil production and the role it plays in a very nervous global market could be extremely expensive, in both economic and political terms.

FYI, Energy Outlook will be on vacation until Friday, December 9.

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