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Iraq and Oil
Ignore everything that is going on with the weapons inspectors. Bush will strike Saddam in the first three months of 2003 and the US will find itself occupying Iraq. The inspections game is being played out of a desire to appease the rest of the world by creating at least an impression of showing deference to the UN Security Council, but the US will not be constrained by anything the weapons inspectors find or don¹t find.
Iraq is a vast country, and a few weapons inspectors cannot possibly thoroughly inspect the place, even if they had years. The vast majority of the finds that the inspectors had in the early and middle 1990s were based on tips and information gathered from high-ranking Iraqi defectors. Very little was found by driving around the country and looking in random buildings of interest. Which is why Saddam is willing to comply with the current inspection regime and also why the US has no faith in it.
Given the coming war, there is much confusion as to why the US has decided to pursue it. The reasons are complex, but one that is put forth by many critics of US policy is of course oil. Iraq has oil reserves of 113 billion barrels, which is the second largest reserve in the world, and almost half of the leader, Saudi Arabia. Despite this vast pool of oil, Iraq has never produced at a level proportionate to the reserve base. Since the Gulf War, Iraq¹s production has been limited by sanctions and allowed sales under the oil for food program (by which Iraq has sold 60 billion dollars worth of oil over the last 5 years) and what else can be smuggled out. This amounts to less than 1 billion barrels per year. If Iraq were reintegrated into the world economy, it could allow massive investment in its oil sector and boost output to 2.5 billion barrels per year, or about 7 million barrels a day.
Total world oil production is about 75 million barrels, and OPEC combined produces about 25 million barrels.
What would be the consequences of this? There are two obvious things.
First would be the collapse of OPEC, whose strategy of limiting production to maximize price will have finally reached its limit. An Iraq that can produce that much oil will want to do so, and will not allow OPEC to limit it to 2 million barrels per day. If Iraq busts its quota, then who in OPEC will give up 5 million barrels of production? No one could afford to, and OPEC would die. This would lead to the second major consequence, which is a collapse in the price of oil to the 10-dollar range per barrel. The world currently uses 25 billion barrels per year, so a 15-dollar drop will save oil-consuming nations 375 billion dollars in crude oil costs every year.
The benefit to the American economy will be 75 billion dollars, which is not huge, but is certainly significant. Lower global oil prices will lead to faster growth in most developed and developing nations, which will benefit American exporters selling to these economies.
Some have argued that the US wants to take over the oil fields. Actually, that is of little value to the American economy. Even if the US simply confiscated all of Iraq’s oil and sold it, it would only add about 20 billion dollars to the US treasury each year. In addition, the US would have to pay for maintenance and investment in the fields, and provide security.
20 billion dollars is a lot of money, but given that the US government spending is over 150 times greater than that, and the entire US economy is 500 times larger, the 20 billion is just pocket change. In the last twelve months, in which the economy has been growing slowly, the US still added over 300 billion dollars to its economy. So the idea that the US is going to war to literally grab barrels of crude does not withstand analysis.
On the flip side, the war itself is projected to cost 50-100 billion dollars. In addition the occupation after the war will take at least 50,000 peacekeepers, each of which cost 100,000 dollars to maintain per year, which adds up to 5 billion dollars per year. And that is if everything goes without a hitch. The Iraq war is not a moneymaker. But it could be an OPEC breaker. That however is a long-term outcome that will require Iraq to be successfully reconstituted into a functioning state in which massive oil sector investment can take place.
I will be discussing the issue of Iraq and the role of American academia at the Muslim Public Affairs Council annual convention in two weeks. It will be held at the Long Beach Convention Center on December 21 with a short session on December 22. Among the panelists that I will be discussing with is Professor Muqtedar Khan, another Pakistan Link contributor. Tickets are 50 dollars, including two meals, and can be obtained from MPAC at Mpac.org or by calling 213-383-3443. Hope to see you there.
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