Oil wars

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Recently, Mark LeVine did a pioneering piece for Tomdispatch on the nature of the chaos in Iraq, including what he termed “sponsored chaos.” The two piggybacked Tomgrams below remind us that the present visible chaos in the region may be nothing compared to the chaos to come — and that on all sides there are parties (and not just American ones) ready to “sponsor” a distinctly chaotic future.

Iraq, as we all know, sits on vast oil reserves that, for complex reasons, have turned out to be difficult indeed to get out of the ground and to market. Despite the fact that the Bush administration is, by prior experience, an energy administration with a geo-energy view of how our planet works, our media spent much prewar time ignoring the issue of Iraqi oil and the clear desire of administration hardliners to plant further American military bases in the heart of the energy lands of our Earth. Oil, as a subject, was largely left to the business pages, when dealt with at all during those prewar (and then postwar and then, again, war) months.

Anyway, that was then, this is now. As Marshall Auerback and Brandon Sprague both indicate, we should brace ourselves for future oil “wars” of unexpected kinds. Auerback, an international portfolio strategist, considers one of Bob Woodward’s recent revelations — that the Saudis had promised the Bush administration a positive pre-election oil surprise — and suggests that Woodward’s information, undoubtedly gathered many months ago, is at best out of date. The surprise, it turns out, may be all on the Bush administration.

Brandon Sprague, a freelance journalist and former student of mine, points to an unreported level of planning underway in Baghdad and Washington when it comes to oil — what the Bush administration in the prewar months referred to as Iraq’s “patrimony” — that could rouse Iraqis to the sort of uprising as yet unimagined. Whether or not Iraq was initially an oil war, Americans, Iraqis, and others in the Middle East could soon enough find themselves in a genuine set of oil wars with chaos to spare. Tom

No “October Surprise” Courtesy of the Saudis By Marshall Auerback

“When we first got here, we tried making friends. We did everything we could to make friends with these people. Then I started evacuating my friends [who had been killed or injured], and it wasn’t cool anymore.” — US Marine Jeremy Heidrick in Iraq, St. Louis Post-Dispatch, 19 April 2004

Worried about $40 per barrel oil? You needn’t be, if Bob Woodward is anyone to go by. According to Woodward, Saudi Arabia’s ambassador to the United States, Prince Bandar bin Sultan, promised President Bush the Saudis would cut oil prices before November to ensure the U.S. economy is strong on Election Day. In an interview with CBS’s 60 Minutes about his new book Plan of Attack on the Bush administration’s preparations for the Iraq war, Woodward, a senior editor at the Washington Post, said Prince Bandar pledged that the Saudis would try to fine-tune oil prices to prime the U.S. economy for the election — a move they understood would favor Bush’s reelection.

“When we first got here, we tried making friends. We did everything we could to make friends with these people. Then I started evacuating my friends [who had been killed or injured], and it wasn’t cool anymore.” — US Marine Jeremy Heidrick in Iraq, St. Louis Post-Dispatch, 19 April 2004

Worried about $40 per barrel oil? You needn’t be, if Bob Woodward is anyone to go by. According to Woodward, Saudi Arabia’s ambassador to the United States, Prince Bandar bin Sultan, promised President Bush the Saudis would cut oil prices before November to ensure the U.S. economy is strong on Election Day. In an interview with CBS’s 60 Minutes about his new book Plan of Attack on the Bush administration’s preparations for the Iraq war, Woodward, a senior editor at the Washington Post, said Prince Bandar pledged that the Saudis would try to fine-tune oil prices to prime the U.S. economy for the election — a move they understood would favor Bush’s reelection.

It sounds wonderful, but if such a pledge was ever given, Saudi actions in the past year suggest that it has been revoked, largely in response to the growing geopolitical morass that is developing in the Middle East. In the aftermath of Gulf War II, it was felt that mobilization against Iraq would give the United States a renewed opportunity to expand its power and influence in the region — this time potentially to use its new Persian Gulf bases to establish even more bases in the ancient territories between the Tigris and Euphrates rivers in Iraq, while remaking a hitherto backward region into a bastion of Anglo-American liberal-democracy. More importantly, many of the neo-cons who now dominate Administration thinking felt that the oil fields seized as a by-product of this invasion would give the United States a de facto seat in OPEC, and control over a huge cash-generating asset required to fund its massive domestic and overseas debt build-up. At the same time, it was also hoped that President Bush would use his expanded leverage to press for a comprehensive settlement of the Palestinian-Israeli conflict.

All of these blithe assumptions look questionable today, to say the least — none more so than the assumptions about oil.

After the end of the Iraq invasion, the oil price fell sharply to $26 (WTI), although little of this can be ascribed to the Saudis, who have been producing at roughly the same capacity of between 8.5 and 9.4mmbd of crude oil, natural gas, and gas liquids for the past ten years, according to figures collated by independent oil analysts, Groppe, Long & Littell (GLL). These price forecasts, made by a number of prominent Wall Street banks such as Citicorp, were based on two assumptions: precautionary inventories built prior to the Middle East hostilities would be liquidated and, under the U.S. occupation, Iraqi oil would flow soon and copiously. In turn, that Iraqi oil would at least pay for the occupation and reconstruction of Iraq — so believed neoconservative planners in Washington and in the new Coalition Provisional Authority set up by the Bush administration in Baghdad.

Since the U.S. occupation of Iraq began, the pipelines north of Haditha have been the targets of repeated sabotage. The result, according to GLL, is a shortage of natural gas and the inability to use all of the capacity of Iraq’s refineries. Consequently, the country is still producing well below its current estimated capacity of 2.5mmbd of crude oil production. Equally problematic from the Americans’ perspective is the increasingly unaccommodating policy stance of the Saudis, who had hitherto been relied upon to offset looming oil shortages. As it now stands, the Israel-Palestine conflict has no direct impact on Middle Eastern oil supplies. However, it has led to a movement of solidarity among Middle Eastern states against the Bush administration’s perceived one-sided support of Israel and in addition has led the Saudis, fearing their “special relationship” with America to be under threat, to play the oil card in a manner highly inimical to American economic interests.

It is not as if the Bush Administration wasn’t warned: Before his visit to Bush’s ranch near Crawford, Texas, Crown Prince Abdullah (through his interpreter) told the press that allowing the Israeli-Palestinian conflict “to spiral out of control will have grave consequences for the United States and its interests.” On June 10th last year, the Saudi oil minister, sent letters to the companies negotiating contracts for participation in the natural gas industry of the Kingdom. Subsequent to those letters, the following has occurred:

*July, 2003 — The Saudi government announces gas agreements with Shell (Anglo-Dutch) and Total (French)

*August — State visit to Moscow by Crown Prince ‘Abd’ Allah-al-Saud

*September — OPEC ministers adopt Saudi Arabia’s proposals to reduce production quotas, despite of expectations in advance of the meeting that the status quo would be maintained.

*January, 2004 — Saudi Arabia announces gas agreements with Lukoil (Russian), Sinopec (Chinese), Agip (Italian), and Repsol (Spanish)

*February — OPEC Ministers adopt another Saudi proposal to reduce production quotas.

Note the complete exclusion of U.S. energy companies in all prominent new Saudi energy ventures; this is hardly consistent with an ostensible pledge to flood the market with oil around October to guarantee the election of a President viewed to be fundamentally hostile to Islamic interests by the vast majority of OPEC nations. It is equally salient that the officially stated OPEC price range of $22-$28 per barrel has largely been ignored by virtually all OPEC members (judging from the extent to which they are producing above agreed quota numbers) — not only because higher prices can be sustained in spite of this widespread “cheating” on quotas, but also because of growing opposition among its members to American policies in the Middle East.

The new, largely unarticulated high oil price strategy should be viewed in the context of Saudi promises to invest billions in the development of the Russian energy industry, and suggestions of an emerging Russo-Saudi oil alliance. Last December, the Russian government announced that its policy for production is to stay under 9.0mmbd for the next five years. Five years is also the term of the oil and gas co-operation agreement signed with Saudi Arabia on September 2, 2003, at the end of the state visit by Crown Prince Abdullah.

The significance of this alliance for the oil market lies in the fact that, in 1998, the value of Russian oil exports was a mere $16bn. In 2003, their value was over $63bn — second only to the $80bn worth of exports by Saudi Arabia. This increasing cohesion of Russian and Saudi energy policies is occurring against a backdrop in which the oil supply/demand balance is tighter than usual and long-term depletion rates are much higher than is generally recognized. Although Saudi Aramco (the state oil company) has historically done what is required to offset declines in existing oil fields and maintain an estimated capacity of approximately 10mmbd through new projects, the higher production required to generate a sharp fall in oil prices cannot be achieved without more personnel and investment, according to both GLL and Houston-based oil analyst Matt Simmons of Simmons & Co, who has recently undertaken an extensive study of the Saudi oil fields.

In fact, given that most OPEC members are already producing close to full capacity (and well in excess of official quota figures), without significant new discoveries in Russia, the effects of more rapid depletion dynamics will manifest themselves much earlier than currently envisaged by the market. From a peak of 11.06mmbd in 1988, Russia’s actual crude oil production in 2003 had fallen to a little less than 8.0mmbd, according to GLL. Much of the new technology introduced to develop Russia’s energy fields will only accelerate rates of depletion in existing fields, leaving remote areas of Siberia as the key variable in determining whether the Putin administration can achieve its publicly stated goal of 9.0mmbd production, let alone get anywhere near the peaks sustained during the late 1980s.

Given that the Saudis and the Russians are two of the world’s largest oil suppliers, the effects of their de facto alliance cannot be overestimated. In early 2003, Saudi Arabia facilitated the invasion of Iraq by temporarily increasing oil production, but all actions subsequent to a June 10th Saudi decision to end negotiations with U.S. companies on the development of the Saudi natural gas fields have been consistent with a broader Saudi reassessment of its respective relations with both the U.S. and Russia.

In 2002, the OPEC oil ministers met 4 times. In 2003, they met 7 times. Thus far in 2004, they have already met twice. The significance of the increased frequency of these meetings over the past 18 months (at least in contrast to the comparative paucity of meetings from the early 1990s through 2002) is that it has allowed OPEC member states to better minimize the risks of overproduction relative to quota allowances. The monitoring of overproduction can be more accurately calibrated with more frequent meetings, note Groppe, Long, & Littell. In fact, GLL argues that OPEC has in effect moved closer to the old model of the Texas Railroad Commission, which still sets monthly allowances for production in Texas. As GLL notes: “The genius of the monthly meetings of the Railroad Commission is that the commissioners did not have to depend on their ability to forecast accurately. Any mistakes made — and some were — could be corrected at the next meeting.”

The goal here appears clear: limit overproduction and keep oil prices high, not flood the market with cheap oil. And with the Saudis clearly not playing ball on oil, one can only surmise that their hitherto almost reflexive move to recycle petrodollar surpluses back into the dollar has likely dissipated as well, removing an important marginal bid in the bond market, at a time when inflationary pressures are intensifying and 10-year bond yields have headed north of 5%. The broader economic and geopolitical implications are enormous: the House of Saud, which has cultivated a special relationship with successive U.S. administrations since the days of FDR, seems to have effectively decided that politically and economically distancing itself from at least the present American government provides a much better means of ensuring its long-term survival.

All of this implies an increasingly precarious backdrop for U.S. financial assets and the dollar, the rallies in which do not fully reflect today’s deteriorating geopolitical and economic variables. Consumers have reached debt saturation with short-term rates at 1%. What happens as rates rise and the oil price explodes? A further price spike in energy could well exacerbate a growing inflationary psychology now predominant in the credit markets, which in turn could undermine the Fed’s recent efforts to “talk down” yields on long-term interest rates.

An oil shock potentially endangering U.S. national security and economic interests is the last thing a debt-saturated America, embarking on expensive overseas ventures, needs right now. Yet that appears to be where we are headed today, the consequences of which are not yet fully reflected in the markets.

Marshall Auerback is an international portfolio strategist for David W. Tice & Associates, a US money management firm with approximately $1 billion in assets. His weekly “International Perspective” can be seen at

Copyright C2004 Marshall Auerback

The Real Oil War in Iraq
By Brandon Sprague

The present fighting, dying, and general chaos in Iraq has been severe enough to send official Washington into something of a panic. It could prove, however, to be but a modest introduction to the potential disaster in store if the neoconservative economic planners of the Coalition Provisional Authority (CPA) act, as they have indicated they might, to cut Iraqi oil and cooking gas subsidies after the installation of a government of “limited sovereignty” on July 1. The issue has not even been raised in the American media, and yet planning for it in Baghdad and Washington has, evidently, proceeded apace as part of the “privatization” of Iraq’s economy. For anyone with some knowledge of the present Iraqi situation, this might seem, on the face of it, an act of inconceivable folly, but given the CPA’s track record on economic and other issues so far, it must be taken as a serious possibility.

For the last 13 or so years, Iraqis have had their gasoline for free, or almost free, which may come to a surprise to Americans who are now paying record-high prices to fill up their tanks. In Baghdad, the cost of a gallon of gas averages just eight cents, approximately 28 times less than the average cost in my hometown of San Francisco. The absurdly huge price difference prompted Congressman Doug Ose (R-Sacramento) to jokingly suggest Californians skip visiting their local filling stations and get their gas shipped directly from Iraq.

Unfortunately, the joke is on us. For the last year, American taxpayers have been footing the bill — as much as $1 billion and counting — to underwrite a subsidy system created by Iraqi dictator Saddam Hussein, who (despite what many in the administration still insist) did not spend every available dinar on secret weapons of mass destruction programs or on his ever-expanding system of opulent palaces and monuments. After the UN imposed comprehensive sanctions against Iraq in 1990, Hussein poured state funds into subsidies on basic goods to keep the Iraqi people from rising up against his oppressive and weakening regime. Coalition officials have for months stated that government subsidies must be “phased out as a matter of economic necessity.” But for Iraqis, who now view access to cheap fuel as a birthright, the subsidy is a small consolation for having lived under a brutal dictatorship and now a protracted occupation.

Many of the ethnic and religious tensions — among Kurds in the north, Shia Arabs in the South and Sunni Arabs in between — have traditionally revolved around the control of major oilfields. But there is one thing all Iraqis can agree on — the country’s oil belongs to Iraqis. Last August, when shortages drove up gas prices in Basra, the until-then peaceful Shia population took to the streets in a violent, deadly, weeklong protest against Coalition troops. Removing the subsidy for good would certainly incite far worse.

This has already led to disagreements between CPA planners and the Iraqis in its hand-picked Governing Council over when and how to remove the subsidy. Merek Belka, Poland’s two-time finance minister and a big advocate of shock therapy in his own country, was appointed economic director of the CPA by Paul Bremer himself. In September, he said that subsidy elimination was “much more important than privatization” because “liberalizing” prices was the first step towards a free market. But that same month Iraqi Oil Minister Ibrahim al-Uloum told the Houston Chronicle that it was not proper to discuss raising oil prices when his workers at the ministry “don’t have clean drinking water.”

This tension will only intensify when the Americans nominally hand over power to Iraqis two months from now. The new Iraqi leadership, whether it is pro-American or not, will have enough sense to know that removing the costly subsidy would quite literally be political suicide and could indeed lead to a bloody revolt against any U.S.-appointed transitional government. At the same time, the new leaders might not have a choice. The nation already owes $120 billion in foreign debt and while oil production is now hovering near pre-war levels and is bringing in much needed revenue, it will take decades for Iraq to undo the devastation of three wars and 12 years of crippling economic sanctions.

The deciding factor in what could be a decidedly unbalanced subsidy debate is likely to be in Washington D.C. at the headquarters of the International Monetary Fund (IMF), which says it will provide $4.25 billion in loans once a representative government has been put in place on June 30, but only under the sort of onerous privatization conditions for which the IMF has now become famous or infamous depending on your point of view. Iraq, of course, desperately needs the money and the Governing Council thus far has done everything in its power to meet the preconditions for an IMF loan. The loan itself would depend in part on the ability of any new “government” to demonstrate to the IMF that its economic programs are strong and aimed at moving the country toward what’s termed “open market reform.” But a quick look at the IMF’s record in politically fragile countries shows its advice sometimes does more harm than good, especially when it comes to pushing for politically sensitive budget cuts such as subsidies.

In 2003, the IMF urged Haiti to eliminate its petroleum subsidies and to allow the price of gas to be determined by market forces. Because the IMF promised a $50 million loan as a reward, the small, coup-prone country obliged. The price of gasoline and cooking fuel promptly soared 130 %, causing nationwide strikes and violent protests against the government of Bertrand Aristide in which a student was killed.

Similarly, riots threatened to interfere with President Bush’s trip to Nigeria last July after the oil-rich West African country dropped its gasoline subsidy in an attempt to woo the IMF back into a lending relationship with it. Indonesia? The same pattern occurred there in 1998: Fuel prices surged 71 % after subsidies were cut at the behest of the IMF, triggering street riots, which left two dead.

There is no indication that the Fund would approach Iraq differently, even though it is already a war zone. In Iraq: Microeconomic Assessment, IMF experts wrote that “the reduction of domestic oil price subsidies would be highly desirable to eliminate their distortionary effect.”

There are certainly manifold problems with the present system. The country’s broken down refineries only produce about half of the supply of oil and cooking gas that Iraq needs. The lines at gasoline stations remain unusually long, something which Coalition officials attribute to the huge influx of cars into Iraq. Smuggling of siphoned off Iraqi oil to neighboring countries, where gasoline is ten times more expensive, is rife; while gas station owners often dilute the gas they sell with water in order to stretch supplies and raise profit levels on such an inexpensive commodity, which results in many sputtering engines on the streets of Baghdad.

The way in which, on taking over from Saddam, the CPA has supplied the fuel — and funded the subsidy — has been fraught with controversy. In December, the Pentagon cancelled a Halliburton contract to buy and ship gas products into Iraq from Kuwait because the company had allegedly overcharged the government by $67 million.

To this journalist’s untrained eye, the immense cost of the subsidy is either missing from or hidden in Iraq’s IMF-compliant budget for 2004, although the food and agricultural subsidies are clearly marked as government expenses.

That is a bad sign for two reasons. As an extra-budgetary expense, the subsidy tab will continue to be picked up by the Americans and, even without Halliburton, importing fuel to keep up with Iraqi demand is a huge cost — upwards of $90 million a month. In addition, if such costs are not even included in the budget, perhaps that is a signal that the subsidy is scheduled to be phased out earlier rather than later — and that the CPA will be capable of doing so by fiat even after a new “sovereign” government is installed in July.

When I was in Iraq last summer, I met a Baghdad restaurant owner named Riath Abdul Razak Hassen. Lines at gas stations then, as now, were as long as tempers were short. American soldiers guarding the stations had been fired at. Although gas was cheap it was in remarkably short supply. A colleague and I were talking with Hassen about Iraq’s vast reserves of oil and, upon finding out we were Americans, he promptly said, “Bilafia,” or “bon appetite,” since he believed that our country was about to help itself to his oil fields.

“May the oil give you good digestion,” he was essentially saying, as if he had tossed all 100 billion barrels that Iraq is supposed to have in reserves into a fine vinaigrette salad and served them to us. Of course he spoke ironically. He had just been telling us that he would have to shutter his restaurant because he couldn’t afford to run the fuel generator needed to bring electricity to the establishment. Iraqis consider it as a national right to have inexpensive gasoline and cooking gas. Take that away from them and the Iraqi occupation would most definitely become a war about oil.

Brandon Sprague, a freelance journalist and recent graduate of the Graduate School of Journalism at the University of California, spent part of last summer reporting for and other places from Baghdad.

Copyright C2004 Brandon Sprague