Imbalance in global energy the legacy of Iraqi oil fiasco

The alleged "war for oil" was in fact marked by remarkable US failings, leaving behind a dysfunctional oil industry.

The Rumaila oilfield in Basra. Reuters / Atef Hassan

The ceremony held last Thursday marking the formal end of the US's Iraq war had an ironic counterpoint. A pipeline bombing in the south temporarily halted oil exports, and confusion continued over ExxonMobil's deal to operate in the Kurdistan region, declared illegal by Baghdad.

Quite apart from its morality, this alleged "war for oil" was in fact marked by remarkable US failings, leaving behind a dysfunctional oil industry that serves neither Iraqi nor American interests.

American officials and pundits, advancing the case for war in 2002 and 2003, made little mention of oil, other than claiming it would enable Iraq to finance its own reconstruction. Larry Lindsey, the economic adviser to George W Bush, a former US president, claimed that: "When there is a regime change in Iraq, you could add 3 million to 5 million barrels [per day, bpd] of production to world supply. The successful prosecution of the war would be good for the economy."

At that point, oil prices were about US$28 a barrel, thought then to be very high (prices had been as low as $9 just four years before). Yet after the invasion, oil prices continued climbing, partly in response to the disruption in Iraq, and soared to $147 a barrel during 2008, partly contributing to the global recession.

Ideas that Iraq could be transformed into a free-market champion that would leave Opec and bring oil prices tumbling similarly faded. A stable, democratic Iraq might have pushed for a higher quota, but it has historical attachments as an Opec founder-member, and would be unlikely to undermine its own interests.

Instead, with a potential rival out of commission, Saudi Arabia's dominance was reinforced; restrained Opec production was a second key factor in record oil prices.

Iraq-induced oil price increases may have cost the US alone as much as $300 billion (Dh1.1 trillion).

Despite the rapid overthrow of Saddam Hussein, and plans to prevent a repeat of the first Iraq war's scorched earth techniques, the undermanned invasion force was unable to protect Iraq's oil facilities.

As much as 80 per cent of war-related damage occurred in the weeks after the end of major combat operations.

In one incident, US troops rushed past the important Daura refinery to take Baghdad, leaving manager Dathar Al Khashab to arm his staff to defend the site from looters. At one point, stray bullets ignited a storage tank, leaving him to fire-fight while dodging incoming fire.

With the general deterioration of security, an extensive sabotage campaign began, targeting in particular the main northern export pipeline to Turkey. As a result, oil production, which had almost reached prewar levels in April 2004, fell to 1.8 million bpd by August. Iraq had produced 2.6 million bpd as recently as 2000; it regained that level only this year.

With the south-north "strategic pipeline" also out of commission, Iraq remains dangerously dependent on its southern terminals for export, vulnerable to interdiction by Iran.

The Iraqi constitution, drafted under US auspices in 2005, is an exercise in reconciling the irreconcilable. It fails to clarify the division of oil authority between federal and regional governments. Since then, Iraqi politicians have repeatedly failed to pass the federal oil and gas law, prepared in 2007, which would settle the question.

Thus continues the long-running stand-off between Erbil and Baghdad, with oil companies active in Kurdistan unable to receive payment for exporting oil, and blacklisted from contracts elsewhere in Iraq.

Partly because of the Kurdistan dispute, the US has failed to meet several other objectives. Despite reasonable security and big discoveries, companies cannot expand their Kurdish oil production. The Nabucco pipeline needs more gas to go ahead and reduce European dependence on Russia. But, denied Kurdish gas, the US has to push shaky schemes dependent on Turkmenistan.

The multiple post-invasion oil sector failures have dramatically upset global energy - and bequeathed a flawed legacy that continues to hamper Iraqis, Americans and consumers around the world.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon

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