Wednesday, November 01, 2006

Our Stake in Iraq

If Iraq is truly the top issue on voters' minds going into next Tuesday's mid-term election, as polls suggest, then it's perplexing that there is so little discussion about the impact of the conflict and its ultimate resolution on Iraq's oil production. Just last week, the Iraqi oil ministry announced that production was finally approaching pre-war levels, which averaged 2.5 million barrels per day (MBD). This is remarkable, given the chaos and sectarian violence we see in daily reports from the country. Since every incremental barrel is exported, higher Iraqi output has contributed to the recent global oil inventory build and accompanying price declines. But if the Iraqi government were to collapse, or the conflict escalated into an all-out civil war, Iraq's oil exports would dry up and oil prices would head back to last summer's highs.

I recognize there are many people around the world who believe we invaded Iraq to get access to its oil. Although I still don't agree, that is academic, today. However we got there--whatever you believe about the influence of oil in the government's calculations--the status of Iraq's oil must be a key factor in our strategic decisions going forward, along with important questions of America's reputation and competing priorities for our armed forces. Anyone who argues that no vital US interests are at stake there ignores the importance of Iraq's oil in a global market that is finally coming back into balance.

It's significant that none of the parties in the Iraq conflict has so far inflicted permanent damage on the country's oil assets. Although much of the violence appears nihilistic to Western eyes, the participants clearly see the oil industry as something that either benefits them or constitutes part of the prize they're fighting to control. There's no guarantee that this forbearance would continue, should the stakes change significantly. And while the resourcefulness of the Iraqi oil industry has nearly equaled that of the Rumanian engineers who kept the Ploesti oil complex operating in spite of massive allied bombing during 1943 and 1944, there's a limit to what clever engineers can accomplish against determined saboteurs.

I'm sure you've seen the worst-case scenarios about a rapid US retreat that opens the door to a wider conflict, with all of Iraq's neighbors involved to various degrees. But while a regional Middle East conflict would be disastrous for global energy supplies and oil prices, a full-blown civil war in Iraq would be almost as bad. Because Iraq exports a higher proportion of its oil production than Iran, at 1.7 MBD vs. Iran's 2.4 MBD, the impact of a collapse in Iraqi production would be nearly as bad as the Iran conflict/embargo scenario that had the market so worried earlier this year.

It's not all downside, though. One of the main reasons for suspicion about US war motives is Iraq's tremendous potential for increasing its oil production. The country's current output is still far less than what would be possible if its 115 billion barrels of reserves were fully exploited. Ironically, US companies may not be the main beneficiaries of a major Iraqi expansion, unless peace breaks out suddenly. Chinese companies are already queuing up to do the work we regard as too hazardous and risky, and that oil could flow east, rather than west. Still, in a global market, it's the overall supply that counts. Doubling Iraq's production would make a big difference in the future price of oil.

Factoring in oil, the stakes in Iraq are even higher than most Americans think. That's not code for "stay the course" or "a new direction," though I do think it is a strong argument that any exit strategy must include leaving behind an Iraqi government capable of controlling its territory and resources. After hearing Vietnam analogies for three years, I think we need to recognize one way in which this conflict is entirely unlike the one that ended three decades ago: if a US withdrawal from Iraq ended up resembling the Fall of Saigon, the impact would be felt immediately at every gas pump in the US. While that fact may not favor the views of one political party over the other, some of the individual candidates for the Senate and the House of Representatives don't seem to grasp the full implications of their prescriptions for Iraq.

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