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A Squeaky Wheel 

by Dan Baum
When Defense Secretary Donald Rumsfeld urged Congress in September to give President Bush the authority to wage war on Iraq, he never mentioned the word "oil." Neither did the senators facing him. The only people in the room who drew the connection were protesters screaming "No blood for oil!" as Capitol police dragged them from the visitors' gallery.


The White House considers vulgar any suggestion that the United States might go to war for oil and, at least publicly, has insisted that it is following a higher moral imperative. "The only interest the United States has in the region is furthering the cause of peace and stability, not [Iraq's] ability to generate oil," White House spokesman Ari Fleischer told reporters in November.


"No blood for oil" is a cracking antiwar slogan -- after gaining prominence more than a decade ago during the Gulf War, it reemerged in some quarters of the left early in the Afghanistan campaign and it is now getting a thorough reprise. And there is, no doubt, an element of truth to it: President Bush wouldn't be thinking about waging war on Iraq were it not for oil. Oil has shaped an American posture in the Middle East for decades, and that posture has clearly made enemies. Washington's defense of Kuwait during the Gulf War and its ensuing decision to base U.S. troops -- including unveiled women -- in Saudi Arabia has inspired Osama bin Laden and his followers to acts of terrorism. Oil makes Saddam rich enough to afford the atomic and chemical weapons Bush says he has or is trying to obtain.


And yet by any hard economic analysis, "No blood for oil" is an oversimplification, a deceptive brew of reality and myth. The oilfields of Iraq are indisputably a prize. They are the second-biggest oil reserves in the world after Saudi Arabia's. But from the point of view of the oil industry and the world oil market, war may be the worst way to exploit those reserves. And in some scenarios envisioned by oil-market economists, "liberating" Iraq's oil could have harsh consequences not just for Saddam Hussein but also for Exxon Mobil, Chevron -- and the global economy.


"The U.S. oil companies have been conspicuously silent on the prospect of an Iraq war, but I would expect the oil men are saying, 'Hell no, don't go,'" says Lewis Snider, a professor at the Claremont Graduate University in California who often writes on how Middle East politics affects U.S. energy security. "I don't believe the present Bush administration is cranking up a war for oil. I think this war would be fought in spite of what's good for the [U.S.] oil industry."





A Liquid Asset -- The most important fact to remember about oil is that it is a stateless commodity; in a sense, it doesn't matter who holds the oilfields. If Satan himself controlled oil deposits, his product would enter the world market to be priced, bought and sold like anyone else's. By the same token, Bush could install his little brother Jeb as the Iraqi oil minister in a post-Saddam regime, and Exxon Mobil would still have to buy oil at world-market prices, and you'd have to buy it at the pump from Exxon Mobil.


The Europeans and Japanese, who are far more dependent on Middle Eastern oil than the Americans, understand this. One could argue that if regime change in Iraq would make the world's oil supplies cheaper and more reliable, they might be in favor of it. "[But] they're not clamoring for war, because they know that war does nothing to secure their oil," says Bernard Weinstein, director of the Center for Economic Development and Research and a professor of applied economics at the University of North Texas.


Consequently, the idea that a Middle Eastern despot might "deny" the United States oil is fanciful. For all intents and purposes, the U.S., which accounts for a quarter of the world's consumption, is the oil market, and at this moment in history shutting off the spigot would hurt the despot more than it would hurt the United States. The kind of shocks that Saudi oil minister Ahmad Zaki Yamani and the Iranians inflicted in 1973 and 1979 are much less likely now. OPEC can marshal nowhere near the unity it enjoyed in the 1970s under Yamani's leadership; the cartel's share of the world market is down to about 40 percent from its 1970s high of 90 percent. Moreover, the U.S. learned a lesson from that era and built the Strategic Petroleum Reserve, which holds several months' worth of oil, depending on the extent to which Americans can conserve.


The second important fact to remember is that Saddam Hussein is not the one barring Big Oil from Iraq's petroleum riches; the United States -- along with the rest of the United Nations -- won't let Saddam sell significant quantities of his oil. Sanctions imposed after the Gulf War also keep him from buying the equipment he needs to maintain wells, pipelines, ports and other necessary infrastructure. If those who make the hard-line argument are right -- that Bush cares only about oil and doesn't really see Saddam as a global security threat -- then he could simply call for an end to sanctions. Or invade Venezuela.


All that said, the United States never rests assured of getting the oil it needs. The country imports half the oil it consumes, and of that, half comes from the Middle East. Middle Eastern oil is not only plentiful but also cheap to find; exploration in the desert costs only about $1 a barrel as opposed to $10 or $12 a barrel in places like Africa, the Arctic and the deep ocean. Former Secretary of State Henry Kissinger once told Soviet foreign minister Andrei Gromyko that a Soviet move on the oil-rich region would justify our use of nuclear weapons. Ironically, the U.S. today spends three to six times more on military means to secure the Middle East ($30 billion to $60 billion, depending on how you calculate it), than the dollar value of the oil it imports from there, according to Snider. The petrogeology of the planet -- diminishing reserves in the North Sea and the difficulty of extracting oil from the Arctic, the oceans and the Amazon basin -- suggests the Persian Gulf will be more rather than less important in the future.





Risky Business -- In a rhetorical slip of the type that got him fired, Larry Lindsey, former chairman of the White House National Economic Council, quantified the link between American economic interests and open access to Iraq's oil reserves: "When there is a regime change in Iraq [and a subsequent end to sanctions], you could add 3 million to 5 million barrels of oil production to world supply" daily, he told the Financial Review last fall. The United States burned about 20 million barrels of oil every day of 2001, so assuming that all of Iraq's production went to the U.S., it could provide as much as a quarter of American needs. Lindsey calculated that the consequent drop in energy prices would add around a half to three-quarters of a percentage point to the U.S. economic output. Bush, having seen what happened to his father's numbers when a weak economy eclipsed a quick war in Iraq, knows Lindsey's growth figures are crucial for 2004.


But Lindsey didn't say when that extra 3 million to 5 million barrels would hit the oil markets. After more than a decade of war and sanctions, Iraq's oil infrastructure is in such lamentable condition that it might take an infusion of as much as $20 billion to keep it going at its current low levels of production, says Youssef Ibrahim, who covered oil and the Middle East for almost three decades for the New York Times and the Wall Street Journal and who now works at the Council on Foreign Relations in Washington. To boost the Iraqi oilfields to their pre-1991 production might cost another $30 billion and take years. That, in turn, requires a stable, competent and friendly government in Iraq.


"Is there a thought that one of the important benefits [of war] is that we can get cheaper oil? Yes," says Ibrahim. "Are they right? No. What they're attempting to do is occupy Iraq, put a friendly government in, and over a long period of time have this country become as friendly as Saudi Arabia has been. Now, whether they can actually do that, the answer is a point blank, big capital-letter No."


Iraq is too fractured and unpredictable, Ibrahim says, and it has zero experience with political or economic freedom. The notion of a stable, democratic, market-oriented government in Baghdad is a pipe dream. "Will any company plunk a billion dollars and 300 employees into Iraq, knowing that they won't be safe and that at end of the day the commitment they made might not be delivered on?" Ibrahim asks. "I don't think so."


So what does Big Oil have to gain from a war in Iraq? There is a temptation to say that Bush and Cheney, being oil men, are waging war to feather the nest of their cronies in the oil patch. After all, the oil industry gave more than five times as much to Republicans in 2000 as to Democrats. But Big Oil craves one thing above all else: stability. The oil business is so capital-intensive that the ability to plan investments -- in exploring, drilling, transporting and refining -- can be as important as the price of crude. "Please, Lord," an oil executive is likely to pray, "make the price $15 a barrel or make it $30, but let us know beforehand and keep it there a while."


War is the ultimate instability. Nobody knows, for example, how much physical damage Saddam might do to his own or his neighbors' oil fields. Will he blow them up? Can he make them toxic or radioactive as well?


The mere anticipation of war has driven oil prices to over $36 a barrel, up from about $20 a year ago. And prices may spike during the war in a "fear premium" of $5 or $6 a barrel, which translates to a 10- to 15-cent price boost at the gasoline pump for American drivers -- and another boost for oil company profits that are already surging. Once the war is over, though, the only direction prices can go is down. Any post-Saddam government will want to pump as much as possible to pay for reconstructing a war-torn country. The lifting of sanctions will make that easier, and gradually, as Iraq's infrastructure is rebuilt, its production will increase.


Here's where the argument that Big Oil wants war to "get" the oilfields falls apart: Until somebody repeals the law of supply and demand, more oil available on world markets can only mean lower prices. Lower prices may be good for Bush's reelection prospects, but they're bad for oil company profits.


The picture is especially precarious for Exxon Mobil, Texaco, Chevron and the rest of U.S. Big Oil. The U.S. lost a three-quarter share of Iraq's oil production in 1972, when Iraq nationalized its oil fields. The oil company with the most -- and best -- contracts to extract Iraqi oil is France's TotalFinaElf. Russia's LUKoil runs a close second. Chevron's bluntspoken CEO, Kenneth Derr, supported sanctions against Iraq in 1988 because, he said in a 1998 speech to San Francisco's tony Commonwealth Club, "Iraq possesses huge reserves of oil and gas I'd love Chevron to have access to." Sanctions offered a chance to pressure Saddam into making room for the American companies.


But sanctions are different from war. Some analysts say that removing Saddam will make it harder for American oil companies to gain the foothold Chevron covets, rather than easier. France and Russia, recalcitrant Bush allies, may be holding out for promises that the U.S. will require a post-Saddam government to honor the preferential contracts their oil companies enjoy -- starting with commissioning French and Russian oilmen for billions of dollars of restoration work. Ironically, as a political price for winning French and Russian support for war in the U.N. Security Council, American oil companies could be frozen out of postwar Iraq.


"There's absolutely no guarantee that U.S. Big Oil will participate" in post-Saddam Iraq, says Kyle Cooper, an oil-industry analyst at the brokerage Salomon Smith Barney in Houston.





The View from Moscow -- Though LUKoil might retain its contracts, the prospect of a post-Saddam government freely pumping oil and driving down the price also terrifies the Russians. Oil constitutes a bigger portion of Russia's gross domestic product than it does for Saudi Arabia. Russia derives some 90 percent of its foreign earnings from oil. The Russians are already pumping all they can and won't be able to take full advantage of any short-term war-induced price hike. Once the Iraqi oilfields are repaired and the Iraqi pumps open, prices are predicted to fall to as low as $13, tanking the Russian economy. Any benefit the United States enjoys from low oil prices will be tempered by sharing the globe with a Russia in financial extremis.


A suddenly rejuvenated Iraq could turn Russia's oil industry into a poor stepsister. "Russia's oil industry [much of which sprawls across the frozen reaches of Siberia] needs ships, terminals, refineries, pipelines, ports -- everything," said Russia expert Tobi Gati, who served as a special assistant to President Clinton and is now a senior advisor with the Washington law firm Akin, Gump, Strauss, Hauer & amp; Feld. "Who's going to invest in high-priced, low-quality Russian oil if Iraqi oil can be invested in for half the price?"


Beyond concern for their wobbly oil economy, Russians nurture a healthy fear of war and the chaos it brings. "[The American] policy is, 'We'll take the risk that the reward of change is worth the risk of instability,' but Russians fear instability more than they want change," said Gati. "We take 9/11 as an affront -- 'How dare you disturb the natural order?' But the Russians take 9/11 as an affirmation of the natural order. World War I started and the Romanovs fell. Instability terrifies them."


Our oil-dependent "partners in peace" in the Middle East -- Qatar, Kuwait, Bahrain and the Emirates -- likewise stand to lose when Iraq returns in a major way to the world oil market. In a burst of off-the-record candor, one White House official put it this way to the Financial Review in September: "Oh, and by the way, after you've helped us invade Iraq, we're going to destroy your economies."


Bush may believe the United States urgently needs another secure source of Middle Eastern oil because, though public rhetoric doesn't yet reflect it, our longstanding friendship of convenience with Saudi Arabia is over. The House of Saud is shaping up as a major enemy in the so-called war on terrorism. Charities owned by royal family members support al-Qaida, 15 of the 19 Sept. 11 hijackers were Saudi, and the Saudis refused to participate in the investigation of the bombing of their Khobar Towers, where 19 U.S. Marines died in 1996, or in the 80-nation agreement to block funding to terrorist groups. Departing from its acquiescence of 1991, Saudi Arabia will neither allow the U.S. to base troops on its soil for an attack on Iraq, nor contribute to the cost of a war.


All that keeps the lid on U.S. hostility toward the Saudis is its reliance on their oil. That could change if Iraqi oilfields pass to friendly hands. "Having launched a war on Iraq from Saudi soil a decade ago," says Snider, the Claremont professor, "we may well end up some day launching a war on Saudi Arabia from Iraqi soil."





Blood for No Oil? -- Many critics of the Bush administration argue that the coming war on Iraq will be a war of empire, that Bush wants to unseat the hostile governments in Baghdad, Damascus, Tehran and Riyadh the way Britain and France ousted the Ottoman Empire from the region in World War I. London and Paris carved up the Turkish-held region in the Sykes-Picot agreement of 1916, which led to the creation of the modern states of Iraq, Syria, Lebanon and Saudi Arabia, as well as British-controlled Palestine. The world, arguably, has paid the price in bloodshed and chaos ever since. In October, unnamed Bush administration officials leaked to the New York Times and the Associated Press plans to occupy Iraq indefinitely, using the American occupation of Japan after World War II as a model -- a plan the Bush administration has not specifically disavowed.


Just talking about such plans is already ratcheting up boundless ill will in the Middle East, says Ibrahim at the Council on Foreign Relations. "If I'm Saudi Arabia and you're telling me Iraq is just the first step in regime changes, it would be dumb for me not to ask the question, 'If Saddam is first, who's second?'" he says. "Clearly Iran is next. Then clearly Saudi Arabia, and then Egypt. So how much welcome do you expect for the Americans who are explicitly saying they're coming to institute democracy in a region that can't even spell the word?"


Perhaps the protesters are right, and in the hidden chambers of the Bush administration there is agreement that oil will be the just spoils of this war. War, however, is notoriously unpredictable, and nobody can say how long and bloody an American occupation of Iraq -- in the region most hostile to the United States -- would be. It may be, then, that Bush ends up with much blood on his hands, and very little oil.





California writer Dan Baum is the author of Smoke and Mirrors: The War on Drugs and the Politics of Failure.





Publication date: 03/13/03
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