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The Oil Mirage

Will Iraq's oil pay for reconstruction? And what's the Saudi angle?

12:00 AM, Aug 5, 2003 • By IRWIN M. STELZER
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THE SAUDI ROYAL FAMILY has decided once again to pour oil on troubled waters. Faced with a congressional report apparently criticizing it for continuing to fund the mosques and schools around the world in which the violently anti-Western, Wahhabi version of Islam is taught, the Saudis persuaded their co-cartelists at last week's OPEC meetings to continue pumping enough oil to keep prices within OPEC's $22-$28 targeted range.

The Bush White House, which had ordered the material critical of the Saudis classified and redacted from the report, was relieved. A cutback in Saudi production would have triggered a rise in already-high oil prices, and derailed the emerging economic recovery so crucial to the president's reelection chances.

And oil is on the president's mind for still another reason. Congressmen on both sides of the aisle roasted Deputy Secretary of Defense Paul Wolfowitz and White House budget director Josh Bolten for refusing to provide a long-run estimate of the cost to the United States of pacifying and reconstructing Iraq, certain to be far more than the $5 billion per month that we are currently spending. Their lack of cooperation stems in part from the difficulty of forecasting the cost of this adventure in nation-building, and in part from Bush's hope that funds from the sale of Iraq's oil will cover costs, relieving pressure on a federal budget that is already bleeding red ink.

But it has proved difficult to get Iraq's production up to its prewar levels of about 2.5-3.0 million barrels per day. Iraq's oil-field workers can't ramp up production quickly when electricity facilities are repeatedly sabotaged and the trucks that get them to work and the computers they need at the office are stolen. The Pentagon, which says that security is its top priority, now plans to reconstitute Iraq's special "oil police," and end reliance on the easily sabotaged electric grid by installing on-site generators at refineries and other key installations. That will take time.

Estimates vary, but a good guess is that Iraq is producing about 1 million barrels of oil per day, with 350,000-450,000 barrels going to meet domestic demand. The balance is being sold on the international market by Iraq's State Oil Marketing Organization to some 10 buyers, including BP, ChevronTexaco, and Royal Dutch/Shell.

Paul Bremer, the coalition-designated civil administrator, visited Washington in a search for more support, but left with his begging bowl empty. He now has to rely on the estimate of Philip J. Carroll, America's adviser to the Iraqi oil ministry, who guesses--hopes--that the Iraqis can export enough oil during the balance of this year to cover salaries, pensions, and other everyday costs associated with reconstituting the Iraqi bureaucracy.

But even if Carroll's goal is met, Iraqi production will not generate sufficient funds to cover the cost of reconstructing the country's infrastructure. So Bremer, who told the Wall Street Journal that Iraq is "a rich country that is temporarily poor," floated the idea of securitizing future oil revenues in order to generate cash now. The Export-Import Bank signed on immediately. But some Pentagon analysts point out that such a process would involve mortgaging Iraq's future oil revenues before a new Iraqi government had access to them. The idea remains alive, but has been shelved, at least for now.

Shelved, too, are plans for restructuring Iraq's oil industry. For a while there was talk of privatizing the industry, perhaps after breaking the state-owned company into several competing enterprises. But the problem of establishing security is now absorbing so much of the coalition's energy that all such ideas are on hold.

Most important of all is that the prospects of developing a plan to reduce the hold of OPEC on oil prices are gone. It is now virtually certain that Iraq will be welcomed back into the cartel's bosom, and will find comfort in that embrace. Like Kuwait after being liberated by the United States, Iraq will help OPEC to maintain prices at levels far above those that would prevail in a competitive market.

The absorption of Iraq into OPEC will not upset the president. He is pleased with a deal that assures price stability, even at considerable cost. Here are the terms of that deal: The Saudi-led cartel agrees to pump enough oil to keep prices from spiking when strikes interrupt supplies from Venezuela, political unrest reduces exports from Nigeria, and wars interrupt production in Iraq. Since Saudi oil costs at most $5 per barrel to produce, the Saudis are not excessively burdened by this deal, which has kept prices at the top of OPEC's $22-$28 target.