Oil industry in no shape to bankroll Iraq's rebuilding


13 April 2003

THE war was not about oil. The peace won't be paid for by oil. As we see searing images of crumbling buildings and shattered bridges in Iraqi cities, it is clear that the cost of rebuilding Iraq's infrastructure is going to be huge.Each war leaves a trail of devastation. But in the case of some wars, the international community might reasonably expect that the country would bounce back because it has natural resources, which have remained unscathed. In Iraq's case, thanks to the US-UK forces' early advance into southern Iraq, the oil fields were secured, protecting an Iraqi asset from destruction and fires. The Bush administration has developed an ambitious set of goals to be achieved rapidly, within 12 to 24 months. Its plans include the reopening of Umm Qasr port, repairs to all major roads, building 10n power plants to restore electricity to 75 per cent of the pre-1991 levels, supply 550 emergency generators, re-establish Iraq's commercial air links, provide maternity care to all Iraqis and build referral hospitals in 21 cities, ensure 25,000 functioning schools with 100 per cent enrolment and provide school supplies to 4.2 million Iraqi children, and rehabilitate destroyed homes.

The US wants to go it alone because, some American analysts argue, past experience of UN management in Kosovo, in East Timor, and in Afghanistan, has not been quick enough. "The US does not want to be accused of winning the war and losing the peace," according to a diplomat. But the cost of rebuilding Iraq is going to be huge, and the amount the Bush administration has asked the US Congress to provide for this purpose, about $2 billion, is not going to be enough. A task force of the Council on Foreign Relations, a New York-based think-tank, had recommended a minimum of $3 billion. Mark Malloch Brown, the Chief Administrator of the United Nations Development Programme thinks at least $10 billion will be needed for reconstruction. And calculations of William Nordhaus, an economist at the Yale University in the US, call for $20 billion-$100 billion, depending on how comprehensive the reconstruction plan is conceived. Some analysts have argued, somewhat cavalierly, that the money will come from oil. Iraq, they say we must remember, has the world's second-largest reserves, at 112 billion barrels, and further exploration could yield another 80 billion to 100 billion barrels. But oil below the ground is not the same as oil in a tanker. Exploring it is a function of technology, international prices, demand, and quotas decided by the Organisation of Petroleum Exporting Countries. Iraq remains a member of Opec, and under Opec's internal discipline, it may be able to expect a quota on par with Iran, of about three million barrels per day (mbd).

Its pre-war production varied between 1.7 mbd and 2.6 mbd. Assuming that oil prices won't fall drastically after the war, that can yield Iraq a revenue of about $14 billion a year. Before 1979, Iraq had a domestic industrial base which accounted for some 60 per cent of Iraq's exports, oil accounting for the rest. By last month, oil accounted for some 98 per cent of Iraq's exports. In other words, Iraq's external revenue will not exceed $15 billion. While reconstruction of Iraq is an important and urgent goal, there are other claimants for that money. As industrial activity and income generation will take some time, Iraq cannot expect an immediate increase in tax revenue. The only way for it to meet its international obligations, is to depend on its oil revenue. And those claimants include international financial institutions, bilateral lenders, commercial lenders, and war reparations. Sorting out that mess will require a Paris Club-type donors' conference. All that will take time. But one inescapable conclusion is that Iraq's oil wealth will not be able to provide much support for reconstruction. In any case, under the current oil-for-food programme, Iraq must spend close to three-quarters of that money to buy food, which was distributed, before the war, to 60 per cent of Iraqis. Now those numbers will increase. If oil won't provide that money, who will? The Bush administration's request to the Congress, of about $2 billion, won't be enough.

Even if Nordhaus's figure of $100 billion is taken as an extreme, it is possible that the reconstruction bill may come closer to $20 billion. (America's annual aid budget for the whole world is about $15 billion). Other donor countries, which had (except the UK and Australia) not supported the war by providing resources, may be willing to chip in, but would require the UN to provide political leadership for the reconstruction effort. The UN's leadership will be necessary for another important reason. Without the Security Council revoking the current sanctions on Iraq, no business deal can go through with Iraq. And without a new representative, recognised and legitimate government in place in Iraq, contracts signed for the reconstruction, even if they are with the US or the UK government, could be subject to international disputes. There is a legal vacuum here. Filling it is a good idea, but a more urgent priority must be to remove the suffering of the civilians, who have suffered from eight years of war with Iran, the war in Kuwait, Operation Desert Storm, and then, 12 years of sanctions. They deserve better. It is time for the international community to compromise, not stand on ceremonies, and agree to a speedy and effective way of arranging for the finances to flow, so that reconstruction could begin. Neither Iraqi oil, nor US Congressional allocations, will be enough.