What About Iraq's Oil?

Congressional hearings are often as interesting for what is not said as for what is. After watching hours of C-SPAN's coverage of the House and Senate hearings on Iraq this week, I only heard the subject of oil come up a few times, and only in the context of how oil revenue was being shared between the central government and provinces. If you didn't know that this war was being fought in the heart of the world's largest concentration of oil and gas, you'd never have guessed it. Perhaps it has become impolite to mention the importance of Iraq's oil, when so many critics have convinced themselves that the whole war was about oil in the first place. Or maybe it's just assumed to be understood as part of the shorthand reference to "vital interests in the region." Either way, the result of the war in Iraq will have a significant influence on global oil markets, and part of my interest in the hearings was in trying to glean whatever I could about the likely outcome.

In his column in today's Washington Post, David Ignatius asks how this war will end, echoing a question that General Petraeus apparently asked in 2003. It's still the right question today, of course, and not just because of the Americans and Iraqis who are being killed or maimed. At the risk of seeming insensitive to those much greater costs, oil remains the lifeblood of global civilization, at least for now, and we can't ignore the pressure that the Iraq War has exerted on oil markets since it began. That pressure has short and long-term components.

At least part of today's $80/barrel price is the result of production lost to sabotage and corruption, and the Iraqi industry's inability to restore production to pre-war levels, along with the risk the war represents to the broader producing region across the Middle East. But in the long run, it is the delay in developing Iraq's enormous untapped reserves that matters most. Few countries have the potential to double or triple their current production, and as long as global oil demand continues to grow, incremental output from the few places with both the resources and the willingness to provide access to them is essential. That won't happen without the appropriate national and provincial legal framework--even if oil revenue is being shared equitably on an ad hoc basis, as Ambassador Crocker indicated--and certainly not until the violence has subsided to the point at which international geoscientists and engineers can work there safely. Hunt Oil's recently-announced agreement in the Kurdish north of Iraq is a special case, rather than a signpost, even if it stands up to scrutiny.

Many analogies have been drawn between the Vietnam War and Iraq, but the one that seems most relevant lately has both positive and ominous overtones. When General Creighton Abrams replaced William Westmoreland as commander of US forces in Vietnam in 1968, he altered the failed strategy of his predecessor and replaced unwarranted optimism with pragmatism. Unfortunately, although his new strategy largely succeeded on the ground, it came too late to redeem the war in the eyes of the media, public and politicians back home. Too much American blood and treasure had been spent learning what didn't work. In many ways General Petraeus looks like the General Abrams of this war, at a point when the country's patience has worn similarly thin.

The possible outcomes in Iraq, however, look very different from any Vietnam comparison, for energy if for nothing else. If Iraq collapses after we leave, and its 1.6 million barrel per day oil exports cease, $80 oil will look cheap. If it stabilizes, reconciles its "ethnosectarian" groupings, and starts to develop new oil fields, prices could start dropping, and no one can say for sure where they'd land. And if Iraq became a satellite of an expansionist Iran, all bets would be off, and the current "risk premium" on oil could expand even further. Whatever this Administration, the Congress and all the presidential candidates imagine about the ultimate end of the Iraq War, they cannot lose sight of its enormous energy implications.