Over a Barrel

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JANUARY 20, 2003

Over a Barrel

The preferred slogan of those opposed to war with Iraq is "No blood
for oil"--an explicit assumption that the Bush administration,
dominated by former oilmen, is going to war primarily to secure
Iraq's copious reserves for U.S. oil companies. "'Regime change' to
a pro-U.S. government would permit the privatization of Iraq's
state-controlled oil resources--and a bonanza for U.S. oil
companies," warns Miriam Pemberton of Washington's left-wing
Institute for Policy Studies. Administration officials, on the
other hand, reject any oil connection whatsoever. When asked, on
CBS radio, whether the likely war is over oil, Secretary of Defense
Donald Rumsfeld replied, "It just isn't. There are certain things
like that, myths that are floating around. I'm glad you asked. It
has nothing to do with oil, literally nothing to do with oil."Both views are half right. On the one hand, there is little evidence
that the administration has designed its foreign policy to enrich
Chevron or Exxon. If the Bush administration were gearing its
foreign policy to the wishes of the oil industry, in fact, it would
have taken an almost exactly opposite course. (Since the Gulf war,
U.S. oil companies, eager to exploit Iraqi resources, have lobbied
that U.S. sanctions on Saddam Hussein be reduced or even lifted.)
On the other hand, even if oil played little or no role in the
administration's war plans, it looms large in the restructuring of
a post-Saddam Iraq. By my count--based on interviews with White
House officials--at least three studies or administration reports
have already been issued on this subject, and at least two others
have been published by think tanks with close ties to the
administration. The State Department has begun a Future of Iraq
project, which, during the week before Christmas, hosted a two-day
meeting of Iraqi-born oil and gas experts to discuss the country's
energy future.

Perhaps unsurprisingly, debate within the administration over how to
deal with oil in post-Saddam Iraq is essentially a continuation of
the struggle between the Iraq "doves" and the Iraq "hawks." On one
side are Secretary of State Colin Powell, the Joint Chiefs of
Staff, the country's foreign policy establishment, and career
officials in State and the Pentagon; on the other side are Deputy
Secretary of Defense Paul Wolfowitz, the Pentagon's Defense Policy
Board (chaired by Richard Perle), Undersecretary of State John
Bolton, the neoconservative political appointees sprinkled through
the administration, and the conservative press and think tanks. The
dovish argument is essentially that, once Saddam is taken care
of--and with him, the threat of a nuclear Iraq-- the nation's oil
should be used as a stabilizing force in the Middle East to
reassure Iraq's neighbors that America's war with Saddam was just
that, and not the beginning of an imperial effort in the Middle
East. The hawkish argument is essentially the converse: that Iraqi
oil resources should be used to remake the Middle East in our
democratic, capitalist image by leveraging expanded Iraqi oil
production to undermine Saudi dominance in the region and, perhaps,
to destroy OPEC itself.

The Powell position has been spelled out in three reports: a
Pentagon study, an interagency study, and a recent study, "Guiding
Principles for U.S. Post- Conflict Policy in Iraq," produced
jointly by the Council on Foreign Relations (CFR) and the James A.
Baker III Institute for Public Policy in Houston. When I asked a
State Department official about Iraq and oil, I was advised to
interview the Baker Institute's Amy Jaffe, who was responsible for
the section of the CFR/Baker report that concerned oil policy.
According to Jaffe, who has worked with the administration's
National Intelligence Council project on energy geopolitics, "A
large preponderance of people in State, the NSC [National Security
Council], and Defense agree with the contents of the report."

The CFR/Baker study tries to address what could go wrong as well as
right after a successful invasion. It assumes that, as the dust and
sand clear from the war against Saddam, American occupying forces
in Iraq will find themselves surrounded by Arab states suspicious
of U.S. motives; an Iraqi middle class that, while grateful for
being liberated, is jealous of its national prerogatives; and,
perhaps, a small group of Iraqis bent on retaliation against U.S.
interests. To ward off a counterreaction, the study says, the
United States must do everything it can to refute the idea that the
war was motivated by "an American wish to `steal' or at least
control Iraqi oil. ... [A]ny efforts to secure Iraq's oil
installations and its future production must be clearly and
credibly presented as actions taken to protect the country's wealth
on behalf of all segments of the Iraqi population." Echoing this
approach, one of the administration reports warns that "the U.S.
and its partners should make it clear that there are no hidden
agendas regarding control of Iraqi oil."

The CFR/Baker study recommends that, wherever feasible, the United
States adopt multilateral approaches to managing the transition and
that it also involve the Iraqi professional class. The Pentagon
report (which has not been made public) similarly urges that the
United States should rely on "a multinational force, as opposed to
the United States." The CFR/Baker study specifically recommends
that after the conflict is over "Iraqi professionals will be able
to undertake normal Iraqi oil operations with continued oversight
by the United Nations. The continuation of the U.N.'s oil-for-food
program structure will assist in building a resource distribution
mechanism with minimal corruption and transparent prioritization in
the allocation of oil revenues." The Iraqis, the report says, "have
the capability to manage the future direction of their oil
industry. A heavy American hand will only convince them, and the
rest of the world, that the operation against Iraq was undertaken
for imperialist, rather than disarmament, reasons."

The report is agnostic about what economic structure Iraq will adopt
to manage its own resources, but it holds open the possibility that
the Iraqis will insist on maintaining state ownership and control
over the country's resources. The report cites the experience of
Kuwait, which, after being liberated by the United States and its
coalition partners in 1991, hired foreign firms to rebuild its
infrastructure but consistently rejected foreign investment in its
oil industry. "Iraqi nationalists," the report says, "could pursue
a variation on the Kuwaiti approach." At the State Department,
Powell reportedly favors keeping oil in Iraqi government hands in
order to keep the country intact under centralized authority.

The CFR/Baker study also holds open the possibility that Iraq will
remain within OPEC. "As a founding member of OPEC," the report
states, "Iraq will experience a strong historical pull to remain
within the organization. As important ... is the fact that
producing outside of an OPEC quota will not necessarily bring
increased resources." In effect, the CFR/Baker approach and
interagency studies endorse a Saddam-less version of the status quo
ante. Iraq would still be run from Baghdad by its professional
classes, who are dominated by the minority Sunni Muslims. Iraq,
Iran, and Saudi Arabia would joust for dominance within OPEC, but
the Saudis, with their larger reserve capacity, would continue to
hold the upper hand.

The CFR/Baker study takes a cautious view of Iraqi oil production in
the months and years following Saddam's fall. While the nation's
oil reserves are estimated to be second only to those of Saudi
Arabia, its production has been dropping since 1979. It is now
producing 2.6 to 2.8 million barrels per day (bpd) compared with
3.5 million bpd on the eve of Desert Storm. To get back to 3.5
million bpd, the CFR/Baker study estimates that it will take between
18 months and three years and cost $8 billion--plus $20 billion to
restore Iraq's pre-1990 electrical capacity. To reach an ultimate
target of six million bpd (compared with about eight million bpd
for Saudi Arabia) "is geologically possible but would take a number
of years and tens of billions of dollars in investment."

Instead of seeing oil as the solution to Iraq's reconstruction, the
CFR/ Baker study sees the oil industry as another part of the
country that will have to be rebuilt, largely with foreign funds.
Iraq's oil, Jaffe says, "is a problem that has to be managed
instead of a benefit." Accordingly, the report doesn't envisage
Iraq becoming a capitalist model for the Middle East anytime soon.
Iraq could as easily become an urban and industrial renewal project
that will depend, in the interim, on aid and advice from its
neighbors and the United States.

The position taken by the CFR/Baker study and embraced by Powell and
the Joint Chiefs could be described as conventionally conservative.
It is focused on removing the military threat from Saddam but,
beyond that, sees merely incremental change in the region after his
ouster. By contrast, the neoconservatives inside and outside the
administration take a radical, even revolutionary, view of what is
possible and desirable in the region; they see turmoil as
inevitable and desirable. Says one senior administration official,
"Upheaval is on its way. We might as well get in front of it." They
see Saddam's ouster not just as a means of preventing a future
nuclear threat but of remaking the entire region along democratic,
free-market lines. One senior official compares the region now to
Nazi-occupied Europe during World War II and the post-Saddam Middle
East to post-World War II Europe. "After World War II, we thought
strategically about what were the key industrial areas of Europe
that need to be under Western control to effect a strategic
domination of Europe," this official says. "If you start thinking
of the Middle East in the same way, Iraq jumps to the front,
because it is that nexus of oil, education, geography."; "The
neoconservatives don't worry about offending potential critics in
Iran, Saudi Arabia, or Syria because... "

The neoconservatives don't worry about offending potential critics
in Iran, Saudi Arabia, or Syria because they think of them as
enemies who should eventually be swept aside by the installation of
a democratic, free-market Iraq on their borders. They reject U.N.
or multilateral participation in a post- Saddam transition. Says
one senior official, "This is the moment where our ideas will be
vindicated, or we can walk away. You can't count on the
international community to establish a new democratic or political
order. The way it would work is that the reigning power would
distribute power and businesses, and which people it chooses to
deal with are automatically made into kings. Do we want to be the
kingmaker, or do we want to default that over to the U.N.? I am not
sure we want to cede it. I would bet the U.N. would seek the
acquiescence of Iraq's neighbors--all of which have vested
interests. There are three that would be problematic: Riyadh,
Tehran, and Damascus. And the U.N. would work through them."

According to reporter Jamie Dettmer, writing in Insight magazine,
neoconservative Elliott Abrams, who was recently elevated to senior
director for Near East and North African Affairs on the NSC,
authored a proposal last month calling for U.S., rather than U.N.,
management and control of the oil fields after Saddam's ouster.
When I called the NSC to ask about the proposal, press aide Mike
Anton denied its existence. But a neoconservative administration
official confirmed that Abrams had made such a proposal and that it
was along the lines that Dettmer had described. "Abrams and people
at DOD [Department of Defense] seem to be sympathetic toward the
U.S. doing it alone," he said.

Neoconservatives also want to bypass the Iraqi National Oil Company
in favor of a free-market approach to oil. The State Department,
one neoconservative official laments, "wants the Sunnis to remain
in power, and they need access to resources through the state. The
Shiites and others would like to see more breakdown of the state
and competitive enterprises." Kim Holmes, who recently became
assistant secretary of state for International Organization
Affairs, commissioned a proposal for Iraqi oil privatization
earlier this year when he was director of international studies at
the Heritage Foundation. The study, produced by Ariel Cohen and
Gerald O'Driscoll, has been well-received among administration
neoconservatives. "The Bush administration," Cohen and O'Driscoll
argue, "should provide leadership and guidance for the future Iraqi
government to undertake fundamental structural economic reform. This
process should include a massive, orderly, and transparent
privatization of state-owned enterprises, especially the
restructuring and privatization of the oil sector."

The neoconservatives aren't looking to enhance Chevron's profits.
They support privatization on ideological grounds--they favor
investment by new Iraqi companies as much as by U.S. oil companies.
"We need to support indigenous [private] groups," says one energy
consultant who works closely with administration neoconservatives.
They also see the privatization of Iraqi oil as setting in motion a
chain of events that could transform the Middle East. If Iraq
privatized its oil resources, it would inevitably leave OPEC, which
requires each member country to strictly regulate their output and
oil exports. And, if Iraq left OPEC, that would mean that two of
the world's largest oil producers (Russia is the other) would be
outside of the cartel, fundamentally undermining its ability to
regulate world output and prices. That would probably mean lower
oil prices, but, more important to the neoconservatives, it would
undermine Saudi Arabia's economic and political clout and perhaps
endanger the Saudi regime itself. Says one senior official, "I don't
think an upheaval or splitting apart of Saudi Arabia would be the
worst thing. I don't see a graceful exit for them. ... I would
expect them to align with Syria and Iran and Libya to bleed us in
Iraq. They may become a real enemy in five years. I don't think we
can get more mileage out of this relationship." This official said
he was speaking for himself, but other neoconservatives, including
Wolfowitz, share a similar outlook. They see the fall of OPEC and of
the Saudi regime as a desirable outcome of a U.S. ouster of
Saddam.

This imagined chain of events--beginning with Saddam's ouster and
concluding with the transition to a democratic, free-market
Mideast--is based in part on an optimistic assessment of how
quickly Iraq's oil industry can be revived and how much oil it can
eventually deliver. Says one official, "If we are going to be
making a stand in the Arab world of reconstruction and establish a
new political order, Iraq is a good place to start because it has
the resources to fuel a reconstruction. It doesn't need the vast
amount of aid. That is one big advantage of oil." Administration
officials directed me to Paul Michael Whibey, a Washington energy
expert who used to work in the Washington office of a conservative
Israeli think tank, the Institute for Advanced Strategic and
Political Studies (IASPS) but who has now formed his own consulting
business in Northern Virginia.

Whibey argues for an Iraqi oil boom. "In the post-Saddam Iraq, I
think we will see very significant additional volumes from Iraq.
Iraq probably has oil reserves equal to or surpassing that of Saudi
Arabia," he says. Whibey, who directed an IASPS project on African
oil, argues that production from Russia and from West Africa, which
he compares to the Persian Gulf in its early days, could
dramatically reduce U.S. dependence on Saudi oil and speed the
demise of OPEC. In such a scenario, says Whibey, "We don't get much
oil [from the Saudis]. We don't need military bases in places like
Saudi Arabia. We have to redefine our strategic interests." From
Whibey's perspective, and those of the neoconservatives, it is not
merely desirable for the United States to break with the Saudi
regime; it is possible to do so without jeopardizing America's
current or future oil supplies.

Which course the United States takes with regard to post-Saddam
Iraqi oil will in large part be dictated by what happens during the
war, should it take place. If the United States goes to war without
U.N. support and if the Saudis prove uncooperative during and after
the war, it will reinforce the neoconservative argument for cutting
the United Nations and Riyadh out of Iraq's postwar reconstruction.
But the most likely turn of events is that the United States wins
the support, however grudging, of both the United Nations and of
the Saudis. (Just this week, French President Jacques Chirac
signaled to French soldiers that they soon would likely find
themselves at war.) That will give the upper hand to those who
favor a U.N. role in supervising Iraq's oil industry and who see
the Saudis as an ally rather than an adversary.

Powell's doves will enjoy another advantage in the contest to shape
post- Saddam reconstruction: Their assessment of Iraq's oil
prospects and of Saudi reserves is probably more accurate. Edward
Morse, a former energy official at the State Department and now the
executive adviser at Hess Energy Trading Company, calls the
neoconservative estimates "wildly optimistic." Similarly, most
experts believe that oil from Saudi Arabia and the Persian Gulf
will continue to loom large in world energy calculations. In a
recent study, Anthony Cordesman from the Center for Strategic and
International Studies estimates that Saudi Arabia has 25 to 30
percent of proven global oil reserves--compared with only 4.6
percent for Russia and 10.8 percent for Iraq. In other words, even
if the United States does control the oil in a post-Saddam Iraq, it
will not necessarily free us of our dependence on Riyadh.

There can be little question that the neoconservative hawks have
played a decisive role in supplying the rationale for invasion.
But, in the end, as with the diplomatic buildup to war, it is
likely that when it comes to determining the contours of a
post-Saddam Iraq, the doves will come out on top. When oil is
involved it is realists, not radical idealists, who usually carry
the day.

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