IRAQ: Oil serves but also burns
Youssef M. Ibrahim

By mixing oil with politics in Iraq, the United States has started a fire it cannot put out. The Iraqi oil industry, and with it vital exports of Iraqi oil, has collapsed. The catastrophe has come at a time when the world is badly in need of extra oil, with producers pumping flat out.

Consequently, oil prices have shot beyond $50 per barrel for the first time in history, maybe $60 tomorrow, and who knows what the day after.

Politicians may argue about the costs and benefits of America`s adventure in Iraq and whether the occupation was a good or bad thing. But no one can deny the obvious, which is that the move has massively reduced oil supplies from one of the world`s major oil producers, which in turn has significantly contributed to shaking the stability, security, and price of the world`s sole strategic commodity.

Equally distressing, there appears to be no end in sight and no substitute for the missing Iraqi oil.

As things stand, the Iraqi oil industry is in ruins. Refineries were looted under the very gaze of American troops and television cameras the very first week of the invasion. Iraqi oil fields, terminals, and pipelines are regularly blown up by insurgents in attacks American soldiers have failed to stop. The sum total has been to deprive an oil-hungry world of an average of 2 million barrels a day (bpd) of oil.

Iraq used to produce 3.5 million bpd under Saddam Hussein`s iron-fisted rule. On a good day now, the country is lucky to pump 1.5 million without interruption. That is an awesome drop with evident consequences for the world economy.

That is not the way US President George W. Bush and his administration figured things, but then oversimplified political calculations always lead to poor outcomes. The neoconservatives who pushed for war in Iraq thought they had a done deal in three simple steps. One: occupy Iraq; two: turn it into a private American gasoline pumping station (call it USA ONE), doubling production to more than 6 million barrels of oil per day with the help of US oil companies. Three: use this huge new oil supply to intimidate traditional suppliers, including Saudi Arabia, other OPEC members, and Russia, which has become a major producer of oil.

But oil is a capricious thing that serves but also burns. In Iraq, insurgents and technocrats appear in effect to have joined hands to turn the sabotage of oil facilities into a weapon against American troops and the American-selected Iraqi government. Whether right or wrong, it has completely reversed neoconservatives` calculations and incapacitated the government of Prime Minister Ayad Allawi, which is losing credibility by the day.

Should the disruption of Iraqi oil exports be compounded by any interruption of production from Russia, Africa, OPEC, or, especially, a very vulnerable Saudi Arabia, oil prices are sure to spiral out of control. Thinking of $100 a barrel is no longer crazy if, say, Saudi Arabia were to shut down its 9.5 million barrels of daily production, even for an hour.

In Iraq things are not getting better. At the last count, the northern pipeline that carries oil to the Turkish Mediterranean port of Ceyhan had been blown up 37 times in 12 months. Terminals at Basra in the south have been attacked at least 10 times, shutting down all exports of crude oil.

What is worse is that no one really knows where the oil revenues are going and how much of any revenues reach the Iraqi people. Graft and corruption are widespread, by all accounts, feeding the anger that in turn feeds the insurgency. Ironically, the United States is now supplying Iraq with gasoline and diesel fuel because Iraqi refineries are still in ruins, and the kidnapping of expatriates who could repair them will keep it this way.

Meanwhile, the world needs roughly 81 million barrels of oil every day. But that is just about all that can be produced right now; supplies are, as the oil analysts like to say “stretched.” They are going to get more stretched as demand rises by between 1.3 percent and 3 percent a year, propelled by two huge Asian economic tigers, China and India, with voracious new appetite for oil.

Deepening this conundrum is that it takes time and billions of dollars of investment to produce more oil. And those investments are not being made.

Take Iraq as an example. To date, of the $18 billion of so-called ‘reconstruction money’ tagged for Iraq by the US Congress, less than $1 billion has been disbursed for that purpose.

While the American service company Halliburton looms large in receiving US contracts, the money is not going to rehabilitate the oil sector of Iraq.

Instead, Halliburton and several other American private contractors are using their funds to construct latrines, new tent-cities, and entertainment facilities for the 140,000 US soldiers fighting the insurgency that is destroying the oil fields, pipelines, and terminals.

But even the government of oil-rich Saudi Arabia has not been investing in its oil infrastructure over the past decade. That is why the kingdom is unable to put a brake on rising oil prices by pumping more oil.

The much discussed excess capacity is proving something of a non-starter. So much for advance planning.

Youssef M. Ibrahim is a former Middle East correspondent for the ‘New York Times’ and energy editor of the ‘Wall Street Journal.’