'War for oil' argument rooted more in suspicions than facts BY SALIL TRIPATHI 5 April 2003 AMONG the first locations that the forces of the United States and the United Kingdom secured during the current war in Iraq were the oilfields of southern Iraq. Since then, the battle for supremacy over Umm Qasr and Basra has continued and in the initial week confusion prevailed over who actually controlled these towns. But it was widely accepted that American and British control over the oilfields appeared total. Those who care for the environment and a financially secure future for Iraq may rejoice in this achievement, because it prevents the Iraqi army from repeating what it did in 1991 in Kuwait - setting the oil wells on fire. But it confirms the suspicion among many in the world that this war is about securing access to oil. If only. This war may indeed be about many things: eliminating weapons of mass destruction, ensuring that future terror attacks in the West are prevented, changing the regime in Iraq, liberating Iraqi people, establishing the superpowerdom of the US, and completing the unfinished business of 1991. But this war is not about oil. As oil industry expert and award-winning writer Daniel Yergin pointed out in the Financial Times: "The widespread belief [is] that the Iraq crisis is not about weapons of mass destruction but, rather, in some murky way, about oil. Yet such assertions are often made in isolation, without an understanding of the overall world oil scene." Connecting the dots may not be enough, for connecting only some dots may reinforce the belief that the war is about oil. The West is dependent on Middle Eastern oil. Many officials in the US administration, including President Bush, have ties with the oil industry. American and British oil firms would like to expand their operations, but oil companies from the three nations that opposed the war in the UN Security Council, France, Russia, and China, have already secured deals in Iraq.
The US intends to privatise Iraqi oil assets after the war. Connecting these dots, a German Green Party activist said: "Saddam is no saint, but to me the whole thing smells of oil." He is not alone. Thousands of protesters in European cities carried placards saying "No blood for oil." Maybe they should wake up and smell some coffee instead. As Nobel Laureate Gary Becker has pointed out, if oil were the driving force, the sensible thing would have been to avoid the war. If the motive was really oil, the US would not have maintained a sanctions regime on Baghdad. Nor, as Valerie Marcel of the Royal Institute of International Affairs in London has pointed out, would there remain sanctions imposed on Tripoli and Teheran. By keeping oil from the sanctioned states out of the reach of the American consumer, arguably the world's most profligate oil-user, effectively ensures that he ends up paying more. The argument that the war is about oil is based on the assumption that oil from the Middle East is pivotal for the world economy. Indeed, Gulf oil remains cheap to produce, which makes it extremely important to keep the world economy rolling at a low cost. As the world demand is expected to rise from the current 77 million barrels a day to 90 million barrels a day in a decade, the Gulf will indeed continue to play an important role. But much of that demand will not be coming from developed nations in the West, but from China and India. Yet this analysis ignores the emergence of other sources.
The past is important, but it is not always an accurate predictor of the future. American dependence on Middle Eastern oil has reduced. Top suppliers to the US now include Venezuela, Nigeria, Norway, Angola, and Saudi Arabia. Only one of the five is in the Gulf region. Oil companies are looking at West Africa, the Guinea Coast, and the Caspian region for its future oil supplies. Since 1999, Russian output has risen by a quarter, and this matters because today Russia is the world's second largest exporter, after the redoubtable Saudi Arabia. True, it is still cheaper to produce oil in the Middle East than in these countries. But it should also be borne in mind that in proportionate terms, the West today spends less on oil than what it used to in 1973, the year of the first oil shock.
The share of the Western income that is spent on oil has declined by more than half, Dr. Becker writes. If in 1975 the Middle East accounted for 40 per cent of the world's daily output of 52 million barrels, today it accounts for 30 per cent of the current daily consumption of 77 million barrels. To increase international prices, Opec nations will have to reduce their supply. That might increase prices, but a higher price would make exploring oil in other parts of the world more viable. As the Wall Street Journal reported last week, it is in the interest of Opec to keep the international prices lower than the level at which these discoveries become viable, or investment in energy-saving, alternative technologies more feasible. While it is true that the reserves of the new sources appear small when compared to the Middle East, according to Yergin, new technologies have emerged, including information and control technologies, remote sensing mechanisms, intelligent drilling, and highly accurate measurement tools, which make exploration and production far more exact and targeted. That reduces the cost of exploration and production. "As a result," he writes, "physical supplies that were previously too expensive or too difficult to produce will now become economically feasible. Over five years, [this] could expand world oil reserves by 125 billion barrels - more than the entire [currently proven] reserves of Iraq."
Do Iraqi reserves, then, not matter, one might ask. Industry analysts have shown that the issue is not of reserves, but of extracting those reserves in a cost-effective manner. Reserves have little to do with production capacity. In fact, Iraqi production capacity has declined by a fifth in the last decade. While Iraq sits on the world's second-largest reservoir, of 112 billion barrels, extracting these reserves is not cost-effective at the moment. Starting from the Iran-Iraq war of 1980, 23 years of warfare has left Iraq's oil infrastructure in shambles. It may take a minimum of 2-3 years, and an investment of at least $5 billion to bring Iraq back to production levels of 1990. At that time, Iraq accounted for two per cent of the world's oil supply, Ms Marcel reminds us. Even if it were to double that, she says, it would not affect international prices. Saudi Arabia's daily production is still about four times as much, and it has enough surplus capacity to act as a swing producer, to maintain the price within an economically-viable range that is in Opec's interests. A revived Iraqi oil industry would be good for Iraqis and good for consumers in the dynamic regions of Asia. But it is not the motivating factor for the war.
///////////////////////////////////////////////////////////////////////// Salil Tripathi, a former economics correspondent in the Far East, is based in London and writes on economics, politics and the arts.