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Iraq: Any Oil Windfall Not Likely To Be Seen For Many Years

One criticism leveled at the U.S.-led war in Iraq has been that it is less about freeing the Iraqi people than about "liberating" Iraq's oil resources and bringing them under U.S. control. Iraq does have enormous oil potential. But experts say that, given the present degraded state of the country's infrastructure, any oil windfall is probably years away. RFE/RL takes a look at the role of oil in the war and at prospects that at least part of Iraq's reconstruction can be funded from oil revenue.

Prague, 7 April 2003 (RFE/RL) -- One criticism that has dogged the U.S.-led war on Iraq is that it is being waged -- at least partly -- for control of Iraq's oil resources.

U.S. President George W. Bush made the case for war based on allegations that Iraqi leader Saddam Hussein was hiding weapons of mass destruction that could endanger the United States. Bush also said the war would liberate the Iraqi people and provide the Arab world with a model of democracy.

But despite these public justifications, suspicions linger in some quarters over the role of oil. Iraq has vast potential oil wealth and holds the world's second-largest known oil reserves, after Saudi Arabia. Critics of the current war point out that many countries around the world are potential terrorist threats, yet only in oil-rich Iraq was the option of war considered seriously.

Oil experts say, however, that this criticism might not be justified, given the degraded state of Iraq's oil industry. They say it will take many years and much money before Iraq's wells are ever profitable.

Dr. Manouchehr Takin is a senior analyst for the London-based Centre for Global Energy Studies. He told RFE/RL that any serious effort to rehabilitate Iraq's oil industry will take at least two to three years and an investment of $2 billion to $3 billion.

"I think to get the whole thing repaired and back to normal requires a period of two years -- when everything begins to operate normally, with all the institutions in place. About two years to get back to something like 3.5 millions barrels a day, which is the potential capacity, or what Iraq was able to produce before the Iran-Iraq war," Takin said.

Before the current war, Iraq was producing about 2.5 million barrels of oil a day -- and exporting about 2 million of those barrels. The proceeds were sufficient to cover basic maintenance costs for the country's oil industry, as well as provide funds for the UN's oil-for-food humanitarian program in Iraq.

Takin said current oil revenue is not enough to significantly raise capacity. He says for this, international expertise would have to be called in and a legitimate government would have to be in place. The legitimacy would be needed to guarantee the validity of Iraq's international agreements.

"[In addition to] the technical problems and limitations, I think the new government will have to have enough legitimacy. No matter what we hear and [what] the propaganda is for or against [the war], I think there has to be a UN mandate or something, or a group of Iraqi people themselves -- and those from opposition exile -- sitting together in a conference, organizing something, having a provisional government, to start operations," Takin said.

Already, the international battle for Iraq's oil resources is taking shape, as the rhetoric over who will administer postwar Iraq intensifies.

On the one side is the United States, which says the coalition of nations now prosecuting the war should have control. On the other side are Iraq's traditional oil partners -- led by the European Union and Russia -- who are saying the United Nations must have the lead role. Although the word "oil" is rarely used, it lies at the heart of the disagreement.

German Chancellor Gerhard Schroeder -- a strong opponent of the U.S.-led war on Iraq -- summed up the European position on 3 April in an address to the German parliament. He rejected a coalition-led administration in Iraq and said the United States should not be left in control of Iraqi oil.

"The Iraqi people must decide their own future. The rights of the people living there must be guaranteed. And the oil and natural resources must remain under the control of the Iraqi people," Schroeder said.

Despite international opposition, U.S. planners are clearly hoping to channel at least some of Iraq's oil revenue to fund reconstruction. The total cost of rebuilding Iraq after years of conflict and sanctions will run to many billions of dollars, with U.S. taxpayers expected to shoulder the biggest burden.

Aside from international opposition, any plan to divert large amounts of oil proceeds to reconstruction faces other obstacles. One would be Iraq's existing agreements with foreign oil companies, many of which presumably are still enforceable under international law.

Another obstacle would be Iraq's sovereign debt to foreign banks, companies and governments -- reportedly well over $100 billion. It's not yet clear how the claims of creditors would be balanced by the country's reconstruction needs.

Experts say that over time -- in a decade or so -- Iraqi oil output could climb to 6 million or 7 million barrels a day. This would be more than enough to pay for the costs of the war and the rebuilding.

But even this could prove problematic. Such a surge in output would surely depress world oil prices. And, Takin says, much would depend on the oil demand in industrialized countries, the biggest consumers of oil.

"With the outlook at present, with the industrialized countries, with Japan, the U.S., Europe, we don't think -- most people don't think -- that the [economic] growth rates will be as high. [The rates] will be very low, if not [in] recession," Takin said.

Iraq's membership in the Organization of the Petroleum Exporting Countries (OPEC) oil cartel would also have to be reconsidered. For Iraq to significantly increase its output, other cartel members would -- reluctantly -- have to agree to cut theirs.

Iraq, a founding member of OPEC, has not been restricted by the cartel's output quotas since 1990. It is still unclear whether the country will be subject to future output quotas or even whether it will choose to remain a member of the cartel.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.