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The war for Gulf oil

Paul Rogers author pic
Paul Rogers
25 May 2004

American and British efforts to gain legitimacy and support for their political project in Iraq are entering a new phase, with a draft resolution to the United Nations Security Council being presented and discussed behind closed doors in the UN’s New York headquarters. The resolution seeks UN backing for the proposed handover to Iraqi administration on 30 June, with some doubt as to the role and powers of US forces in Iraq after that date.

Meanwhile, as President Bush on 24 May promised “focused and unrelenting” efforts to “hold this hard-won ground for the realm of liberty”, discussions between his envoy Robert D. Blackwill and the UN’s Lakhdar Brahimi continue to address the “complicated geometry” of Iraqi power relationships after the transfer.

At the same time, the investigation of the affairs of Ahmad Chalabi, the Iraqi figurehead long championed by American agencies to advance their political ambitions in the country, is another indication of the remarkable lack of coherence in United States policy in Iraq, noted in last week’s column in this series. While Donald Rumsfeld protested ignorance of the raid on Chalabi’s Baghdad residence on 21 May, other sources were circulating evidence to indicate that the Iraqi Governing Council member had been used by Iranian intelligence to tempt the US into its Iraqi adventure.

Behind the diplomacy and the political confusion, the Iraqi insurgency continues. A rocket attack on a US base north of Baghdad on 24 May killed an American soldier and wounded four more; the same day, two British civilians connected to the country’s foreign office were killed in an ambush outside the coalition headquarters in Baghdad; two Russian civilian contractors were killed and five wounded in an attack on a bus on 26 May. Most seriously of all, intense fighting around the cities of Najaf and Kufa between coalition troops and forces loyal to the Shi’a radical cleric Muqtada al-Sadr continues, involving controversial damage to the shrine of Imam Ali in Najaf in addition to the deaths of civilians.

Thus, the United States-led coalition remains under severe pressure in Iraq in three areas – political, diplomatic and military. As if they were not enough, a fourth area of concern – economic - has come to the forefront of concern in recent weeks, and it is worth examining how the oil factor connects to American strategy in Iraq and the wider Gulf region over the longer term.

Since January 2004, oil prices have risen 25% to reach over $40 a barrel in late May – and as high as $41.80 on 24 May, the highest level since 1983 - awakening fears of a serious oil price shock reminiscent of the early 1970s and late 1980s. The potential impact on United States and British politics could be especially great, not least as there are suggestions that one of the main reasons for the price increases is the anger of some Arab oil producers at recent coalition actions in Iraq.

The actual situation is rather more complex; a continuation of the price trend is not inevitable. But the longer-term prospects are precarious and there is a deeper truth in the assessment of a link between oil and politics: movements in the oil price are indeed intimately bound up with US policy in the Gulf region (see the articles in this series of 9 January 2002 and 27 December 2002).

A mixed blessing

The first round of oil price rises, from October 1973 to May 1974, was very much a result of the actions of oil producers. Arab members of the Organisation of Petroleum Exporting Countries (Opec) cartel put up prices and cut production in order to exert influence on western countries to pressurise Israel over the Yom Kippur/Ramadan war. This set in motion decisions by other Opec members which, along with the activities of speculators, led to a price rise of over 400% within a few months.

The 1979-80 price increases were less extreme and were due mainly to supply interruptions during the Iranian revolution and the start of the Iran/Iraq war. After this, during the 1980s, the power of the oil producers decreased, even though oil-import dependency was spreading to countries such as China.

On both occasions, the trans-national oil companies (TNOCs) did very little to curb prices. For them, surging bull markets were very good for business – they could buy oil at one price and sell to the consumer at an inflated price within a few weeks, even though it would take 100 days or more for oil to get from the oil fields to the petrol pump.

“Buy low, sell high” was a good tactic and it was little wonder that many of the TNOCs recorded spectacular profits in 1974 and 1980. This was a lesson that western governments had to learn the hard way – especially those who had persisted in the old-fashioned idea that multinational corporations essentially act in the interests of elite countries rather than their own.

The current price surge does stem partly from some modest Opec cuts in oil production earlier in the year, and there may indeed be an element of displeasure at US policies, but two other factors are at work. First, a continuing increase in demand, especially in China and the United States; second, speculation fuelled partly by the fear of disruptions of supply due to paramilitary action in Iraq.

Repeated attacks on Iraq’s oil infrastructure have caused concern and have added to such speculative pressures. It would normally be possible for the world’s largest exporter, Saudi Arabia, to compensate for any shortages by increasing production. This the Saudis are now doing, but only belatedly, so that there are likely to be some further price increases - especially as demand for gasoline increases with the onset of the summer “driving season” in the United States with its heavy use of air conditioners, vacation cars and trucks.

Such increases might appear to benefit producer countries like Saudi Arabia by improving their revenue streams. In practice it does not work like this. Many of the western Gulf States such as Kuwait and the Emirates have long since invested many of their oil revenues overseas, principally in Europe and North America. Kuwait gets around half of its governmental income from such investments and the other half from oil exports. This means that if the price of oil surges too much, a recession can ensue in the west and investment income falls.

The consequence of this is a fine balancing act. Many Opec members would like so see the price remain around $35-40 a barrel – enough for lucrative revenues but not enough to damage investment income. The problem is that this is a difficult if not dangerous balance to achieve, given the current political turmoil in the region.

The end result is that oil prices may hold steady at around current levels, but there is a real risk of a sudden further increase, especially if al-Qaida or one of its affiliates can succeed in disrupting Saudi, Kuwaiti or Emirate exports in addition to the current interruptions in Iraq.

High stakes, hard options

This current volatility may only be a taste of what is to come in the longer-term future. The trend of the past thirty years has been for an increase in dependency of the industrialised world on Gulf oil at the expense of almost every other region. In addition to most of Europe and Japan, with their near-total import dependency, even the United States now needs to buy almost 60% of all the oil it uses, and China and India are rapidly increasing their oil imports as well.

Meanwhile, there are more and more discoveries of oil in the Gulf region. Despite exporting vast quantities of oil throughout the 1990s, Saudi Arabia, Iraq, Kuwait and the Emirates have all seen an increase in the size of their oil reserves. Iraq’s estimated reserves actually went up 15% from 1990-2002. Only Iran has seen a decrease, and that has been modest. On 2002 figures, these five states, together with the smaller oil fields in Qatar and Oman, collectively have reserves totalling 690 billion barrels - almost 70% of total world oil reserves.

By comparison, the United States has just 3% of world reserves and the UK’s North Sea reserves are down to less than 0.5%. Even the combined reserves of the Caspian basin and Siberia are little more than half the size of Iraq’s oil. This certainly helps explain why the Bush administration is so attached to the idea of a client government in Baghdad and a nice, friendly, long-term relationship.

This is the current situation, but what also has to be remembered is that this is a snapshot rather than the indicator of a trend. To assess the likely circumstances a generation or two ahead, the signs indicate that Gulf oil reserves will become steadily more important, especially as demand from China and India continues to grow. Put simply, whoever can exert the most influence over the Persian Gulf region, especially if that extends to a capability for military control, will wield quite extraordinary international power.

For that reason alone, if current American policy in Iraq does fail and the result is a disorganised and chaotic withdrawal, the extent of the foreign policy disaster that will unfold will be much greater even than any immediate sense of victory felt by al-Qaida and its affiliated paramilitaries. It could set back US control of the world’s richest energy sources for well over a decade.

In short, it is no exaggeration to say that what happens in Iraq over the next year could have a defining impact on global security trends well into the third decade of the 21st century.

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