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Not Enough Oil in Iraq

Will Iraq's oil earnings be large enough to pay for its post-war reconstruction?

March 28, 2003

Will Iraq's oil earnings be large enough to pay for its post-war reconstruction?

Iraq's oil revenues are certainly a tempting honey pot. Imagine an Iraq that, by itself, could generate the financial resources to fund its own reconstruction. Such a scenario would provide tremendous relief to the United States, other nations and international organizations.

This expectation is illusory, however. Oil revenues currently generate something around $12 billion each year for the Iraqi economy.

And that $12 billion is currently spent on the immediate needs of the Iraqi population, for such things as food and medicine — and some of it for Saddam's life style.

Some 60% of the Iraqi population depends on the government to meet basic needs. These humanitarian needs — and the bill for them — will not go away after the war. Thus, in effect, some of Iraq's current oil earnings are already earmarked. To claim that they can be spent on other reconstruction tasks is double-counting the same money. Call it the Enron option for Iraq's future.

Of course, there is the part Saddam spends for himself. And Iraq has the potential to pump more oil than its recent production levels. The country's oil production has fallen from a peak of roughly 3.5 million barrels per day to roughly 2.8 million barrels and the capabilities of the oil fields and pipelines have seriously deteriorated, due to lack of maintenance and upgrades.

However, even the prewar level of production may be difficult to achieve quickly. One immediate consequence of the present military combat will be the shutdown of — and some severe damage to — the current capacity.

Depending on the level of that damage, it is likely to take several years to restore Iraq's oil fields to the prewar level of production.

Industry analysts and experts moreover believe that every penny of that revenue, including the part Saddam has been keeping, will be needed to repair, rebuild and upgrade the oil industry infrastructure to pre-l990 levels.

This effort alone, plus upgrading the Iraqi electricity grid to provide power at the 1990 level, could consume $25 billion. Without such an investment, it will be hard for the Iraqis to exploit the significant long-term promise in the Iraqi oil fields.

Only 17% of the 74 proven fields of reserves have been exploited — and adding the probable reserves makes the Iraqi oil fields the second-largest reserve in the world after Saudi Arabia. However, it will take even more capital investment over some years to exploit those reserves.

A Council on Foreign Relations working group estimated that this investment alone could require $30 to $40 billion.

Any oil revenues not needed for basic supplies for the population would therefore likely be used in the oil fields. Only with luck would any be left over for humanitarian assistance, claims settlements or reconstruction.

Why not raise the prices and produce more revenue? Over the longer term, some analysts have argued, resources will grow with major increases in oil prices and Iraq's production — perhaps to the 6 million barrel level.

But even this estimate must be treated with caution.

Iraq, after all, was a founding member of OPEC — and is likely to remain in that organization. Production quotas will limit Iraq's ability to grow its production at the rate some observers currently expect.

Were Iraq to leave OPEC and enter the open market, its oil exports would be likely to depress international oil prices — rather than raise them. While this may be good news for oil-importing countries, it would depress revenues Iraq realized from increased production.

What complicates this funding picture even further is the staggering debt which Iraq has piled up. At more than $62 billion, Iraq sovereign debt is one of the highest in the world relative to its GDP.

In addition, according to the Center for International and Strategic Studies, unsettled claims against Iraq submitted to the UN Compensation Commission total $172 billion — and another $27 billion remains to be paid on already settled claims.

Beyond that, the Iran-Iraq war has given rise to $100 billion in reparations claims. Finally, Iraqi contracts currently signed with various foreign countries come to an estimated $57.2 billion.

One by one, these financial "overhangs" will have to be dealt with — through rescheduling or renegotiations — or they will have to be paid.

What these findings make plain is that the idea that Iraq's oil earnings will provide a "free ride" for the United States — and/or the rest of the world — is simply mistaken.

Humanitarian relief, governing and reconstructing Iraq will rely on the good will of other nations and international organizations. The United States cannot do it alone.

Ideally, other organizations such as the United Nations Development Program, the World Bank and the Asian Development Bank can play an important role, as well as the European Union, coalition partners and even nations that opposed going to war like France and Germany.

However, U.S. international leadership in this effort requires intensive and careful cultivation of other nations and international organizations. This is not the diplomatic track record the United States showed during the build up to the current conflict.

Given the ill will left behind, the United States could well find it is left with the lion's share of the bill for all forms of assistance — human need, governance and reconstruction.

There are no easy solutions here. Oil revenues will only provide for the long-term in Iraq. And the old concept that prevailed for the past decade — where the United States takes care of the military action, and the rest of the world finances reconstruction — is going to be hard to come by in Iraq's case.