Resource Nationalism

Every now and again you run across an article that presents such a topsy-turvy view of reality, so compellingly, that you just have to nod in admiration of its author. Today's New York Times includes such an op-ed, lambasting Iraq's proposed Oil and Gas Law as the tool of evil, resource-grabbing US oil companies, the Seven Sisters (now four.) She paints a picture that would be comfortingly familiar to those who thought that the film "Syriana" (10/12/06) portrayed the real world of oil: a vast conspiracy between big corporations and the US government to invade Iraq and strip its people of their rightful oil wealth. Like all effective propaganda, it is grounded in fact, but its departures from reality speak volumes about the author's transparently anti-globalist and anti-capitalist agenda. The fulfillment of this ideology would leave the Iraqi people even worse off than they already are.

Ms. Juhasz more or less accurately describes the global shift that put most of the world's oil reserves under the control of national oil companies (NOCs), and out of reach of the international oil companies (IOCs), except on a low-margin, service-contract basis. And she is correct that the terms of the Oil and Gas Law, about which the Iraqis have been arguing for the last three years, would avoid re-creating a similar state monopoly within Iraq, thus putting it out of step with its neighbors. Iran, Kuwait and Saudi Arabia all run their oil industries as arms of government, with minimal foreign participation. Factual enough, so far. Where the fantasy begins is in Ms. Juhasz's notion that Iraq is in a position to establish its oil industry along similar lines, without enormous infusions of foreign capital and expertise--and without the incentives necessary to attract them.

It's worth recalling how and why those neighboring national oil companies took control of the foreign oil ventures on their soil. In the 1960s and early 1970s, international oil prices were low and stable, and the international companies that controlled production--paying taxes and royalties to the host nations--were intent on steadily increasing production to keep prices low and demand growing. These countries saw an opportunity to nationalize these holdings, assume direct control, and limit supplies, to their great financial benefit. I'm sure Ms. Juhasz sees the resulting transfer of wealth to OPEC's members as entirely proper. But there are crucial differences between those circumstances and today's Iraq. In the 1970s, the NOCs took over a slate of relatively new assets and were positioned to thrive from day one. In contrast, the Iraqi oil industry lies prostrate, struggling to sustain production from facilities that were maintained with spit and bailing wire during the long sanctions that kept Saddam's ambitions contained, and then further damaged by war and sabotage. Even if the civil war ended tomorrow, Iraq would require years of assistance just to maintain its energy status quo.

Iraq's oil fields hold great promise, and every IOC in the world must salivate at the prospect of being invited in to develop the country's enormous untapped reserves. But today's industry is a far cry from that of the 1960s. None of these companies, which are much more international than they were then, expects to be handed ownership of all this oil, or to run Iraq as an oil-fiefdom. Whether the ultimate contractual terms end up resembling those in fellow OPEC members Nigeria or Angola, or more like those in the UK--hardly an exploited third-world country--they need to be commercial and mutually agreeable. If in the future Iraq doesn't see the benefits it expects, or believes it was taken advantage of in a period of weakness, it would not be surprising for them to renegotiate those terms. Every company looking at Iraq understands that perfectly well, from long experience elsewhere. They have a large incentive to strike deals that will endure, rather than going up in smoke just after the big investments have been made, but before they have paid out.

Whatever the ultimate basis for international participation in the Iraqi industry, all of Ms. Juhasz's concerns are moot until the civil war subsides, a strong government emerges, and the persistent sabotage of energy infrastructure ends. Once that happens, the interests of the Iraqi people will be served best by an energy industry that can attract foreign capital and expand its output, providing employment opportunities and a growing stream of royalties and taxes, rather than being starved and hobbled by an inefficient and corrupt bureaucracy.