US and the World

Iraqi Oil Shortage?

While Iraq may have vast petroleum reserves, getting them out of the ground will require money and time. The money will have to come from consortia of petroleum companies; the time will be required to develop the legal infrastructure of the Iraqi economy, including oil laws, as well as to replace the badly decayed physical infrastructure. The author, Daniel Yergin, argues that the model for Iraq’s economic transformation is not that of post-WW2 Germany or Japan but of post-Cold-War Russia, Poland, and the Czech Republic.

He opens

The epic Gilgamesh tells the story of a Noah-like flood that engulfs ancient Mesopotamia in what is now Iraq. A modern version of the Gilgamesh myth is around today. It is the story of how a great flood of oil will flow from the fields of Iraq, not only transforming the world oil market but also liberating Iraq from the economic desperation left behind by Saddam Hussein . . .

. . . As the Russians found in the 1990s, to move from a "bazaar" to a market economy requires the establishment of the rule of law and the sanctity of contract, which does not happen overnight.

Yergin does not foresee the US stiffing the oil companies which had negotiated deals with Saddam, though he does predict some difficult negotiations to create the kind of consortia that would include not only those (China, France, Russia, etc.) with deals but also those (American, British, and others) that do not now have them.

Here is where we come to the modern Gilgamesh myth – the notion that vast amounts of additional oil will soon flood from Iraq. In reality, major oil development requires big spending and is governed by what might be called "the law of long lead times." People talk ambitiously about Iraq's adding another 2 million barrels per day within three to four years. That's a great deal of oil – the equivalent of creating another Kuwait. But it's not cheap. The cost of adding another 2 million barrels per day of production capacity is estimated at $30 billion-plus. And it probably will take seven to 10 years to get there. . . .

. . . What will be the goals of the American and British governments when it comes to oil? A popular assumption is that "it is all about oil" – and, some would now add, "about construction contracts." But that misses the entire point. Whatever the commercial interests of companies, the two governments' foremost interest will be to see Iraq increase its oil production as fast as possible.

Of course, this will take time and those negotiations between nationalistic Iraqis, arguing that the geology is so favorable that they must retain a larger share of the proceeds, and profit-minded corporations, maintaining that the political and social environment is volatile and investment is risky, will be lengthy.

But how quickly will all this come? Hopefully, from the viewpoint of the Iraqi government, more quickly than what has happened in neighboring Kuwait. A decade ago, after the Gulf War, the Kuwaiti government said that it would like to open up its oil industry to international investment in order to expand capacity and earn more export revenues. It has yet to happen. The subject is still being debated in the Kuwaiti Parliament.