Tuesday, January 9, 2007

Petrodollars, al-Sadr and the Proposed Iraqi Hydrocarbon Law

January 07, 2007

It has been obvious from the outset that the invasion of Iraq had a lot more to do with the geopolitics of oil than it did with any humanitarian concerns about Saddam Hussein's regime.

In the early 1970s oil production in the United States peaked, and a whole host of related economic problems began to surface. President Nixon had to take the United States off the gold standard, inflation started to rise and the long-term economic future of the United States appeared in doubt. The United States rescued itself from this situation by striking a deal with Saudi Arabia in which Saudi Arabia was guaranteed protection by the United States, but in return most of the petrodollars that were created by Saudi oil sales would be recycled back into United States economy. In the following 20 years, hundreds of billions of petrodollars made their way back into the United States as a result of long-term service contracts, construction contracts, arms sales and other transactions.

In addition, the discovery and exploitation of the North Sea and Prudhoe Bay oilfields had much to do with the economic growth that the United States and United Kingdom have enjoyed over the past 20 years. By the beginning of the second Bush administration, however, it was clear that both of these oil-producing regions were in an advanced state of depletion and that their production would soon began to quickly decline. In fact, their production has declined markedly within the past few years. This represented a significant threat to the economy of the United Kingdom in particular.

The single most important goal of the Iraq invasion was to ensure that Iraq ended up on a petrodollar recycling arrangement like the United States has had with Saudi Arabia, where much of the money is sent back to the US through service contracts, and the much of the rest is invested on Wall Street. In fact, President Bush's advisers may have been telling him that literally the economic future of the United States hinges on long term success (and by success I mean the recycling of petrodollars back into the US economy) in Iraq. The US is already on a precarious economic footing with its budget deficit and current account deficit both spiraling out of control. This would explain the uncharacteristic behavior of officials such as Vice President Dick Cheney over the past five years.

Making the economic situation even more critical is the fact that that the major Western oil companies are already having a big problem with reserve replacement that is going to get a lot worse in the years to come. Many have likely been fudging their books for years as Royal Dutch Shell was caught doing a few years ago. The market capitalization of the oil companies, which is critical to Wall Street, ultimately hinges on their ability to replace the oil that is being produced and sold to consumers with new reserves. They have been frustrated in being able to do this by the fact that they are for the most part frozen out of the best areas of the world by national oil companies, which dominate OPEC.

Iraq has the second largest conventional oil reserves in the world (five times more oil than in the United States), and they are largely undeveloped. This is shown in the scatter chart that is depicted below. It would have been clear to any sophisticated observer of the oil industry back in 2001 that Iraqi oil production was destined to increase significantly within the next few decades, simply because that is where the oil is. As Saudi production declines (it may be beginning to decline right now), within a decade or so Iraq will almost certainly become the world's leading oil exporter. It is clear that the US/UK saw Iraq as a ripe plum for the picking back in 2003. What we don't know is whether they thought control of Iraqi oil was a dire necessity to US interests or that it would just be nice to have. We are going to find out in the next year, I think. Reserves and Production Mapping.gif

The US occupation of Iraq has failed to quell the insurgency, and continued occupation has become politically unacceptable in the absence of another event that galvanizes public opinion such as the attacks of September 11, 2001. Given the stakes involved, though, it is unlikely that the United States is prepared to give up its ambitions for control of Iraq's oil resources.
Recent events suggest that the end game for the control of Iraqi oil has begun. The opening gambit on the part of the United States is the introduction of the proposed new hydrocarbon law to the Iraqi parliament that is planned within the next few days. This new law would give Western oil companies a very lucrative long-term deal at over twice the standard industry profit level through profit-sharing agreements (PSAs) and would preclude the Iraqi government from nationalizing its oil industry in the future as most of the other OPEC nations have. The Independent has been doing some excellent reporting on this in the past few days. From that article:

"Three outside groups have had far more opportunity to scrutinise this legislation than most Iraqis," said Mr Muttitt. "The draft went to the US government and major oil companies in July, and to the International Monetary Fund in September. Last month I met a group of 20 Iraqi MPs in Jordan, and I asked them how many had seen the legislation. Only one had."

Clearly, this legislation was written by and for the major Western oil companies. The proposed legislation also provides insurance against possible future policy changes by Iraqi governments that may not be as compliant as this one is to foreign interests:

Iraq's sovereign right to manage its own natural resources could also be threatened by the provision in the draft that any disputes with a foreign company must ultimately be settled by international, rather than Iraqi, arbitration.

In other words, if Iraq tries to nationalize its oil industry and kick the oil companies out within the next 30 years an arbitrator will rule against it and the United States will have a pretext to invade again.

The hydrocarbon legislation is just the first step in implementing the US plan. The oil fields and pipelines will of course need "protection" from insurgents that is paid for out of Iraqi government funds to US/UK mercenary/security companies such as Blackwater. The Iraqi government will need "guidance" investing its oil revenues. Bechtel and Halliburton will be given billions of dollars of contracts to provide reconstruction from all of the damage caused by US bombing and years of sanctions in the 1990s. When all is said and done, billions of new Iraqi petrodollars be recycled back into the US and British economies in order to offset the loss of revenue from domestic oil production.

Of course, questions remain as to whether the Iraqi parliament is actually going to pass the proposed legislation. Beyond that, there are also questions as to whether the Iraqi people are going to stand for the law even after it passes the parliament (the overwhelming majority of Iraqis are in opposition to long term US involvement in Iraq). The key group of lawmakers within the Iraqi parliament would appear to be the supporters of Muqtada al-Sadr. Originally part of the pan-Shi'ite United Iraqi List supported by Ayatollah Sistani, the Sadrists have been boycotting parliamentary sessions and there have been rumors that they have been contemplating leaving the Shi'ite bloc in favor of a coalition with Sunni legislators. This has caused a great deal of concern, both in Washington and Iran. Despite a low level of armed conflict between al-Sadr's Mahdi Army and certain Sunni factions (possibly exaggerated by elements that would like to drive them apart), the Sadrists and the Sunnis have certain positions in common, such as favoring a strong central government and opposition to the continued presence of foreign troops within Iraq. A successful Sadr-Sunni alliance would be a disaster for US neocon policy makers.

The principal rival to the Sadrists within the Shi'ite bloc is the Supreme Council of The Islamic Revolution in Iraq (SCIRI), which like the Sadrists possesses an armed militia, the Badr Brigades. SCIRI appears to be more compliant with the Western agenda at this point than the Sadrists are. SCIRI has not publicly taken a position on the proposed hydrocarbon law, but it is extremely unlikely that the United States would be pushing the bill's introduction at this point without its strong support. In the past, SCIRI has taken positions that would seem to indicate that it would be supportive of regional rather than central control of the oil industry, meaning that the Shi'ites of southern Iraq would end up controlling the lion's share of the Iraqi oil revenues. It is unclear at this point whether the proposed hydrocarbon law has been drafted with SCIRI's preferences in mind, but it is probably a good assumption.

Does the United States have enough votes within the Iraqi parliament to ensure passage of this law? It is realistic to expect that widespread bribery and extortion is going on to turn as many votes as possible in favor of the legislation. Would the United States ease pressure on Iran in exchange for Iran using its influence to support the passage of this law in the Iraqi Legislature?

The hasty recent execution of Saddam Hussein may have been arranged in order to placate the Sadrists and have them return to the parliament, not because they would be likely to support the law, but in order to give it greater legitimacy should it pass. Al-Sadr has not made any public statements on the proposed legislation, but his history as a strong Iraqi nationalist makes it likely that he will strongly oppose it. Will the Sadrists be upset enough over the proposed legislation to leave the pan-Shi'ite list and join forces with the Sunnis and other minor parties such as those representing the Turkish minority? If they do so, will they have enough votes to thwart the plan? If the legislation passes, will the Sadrists actively join the insurgency? Is the threat of this the reason that the Bush administration is proposing a troop surge within the next few months? If the South of Iraq erupts in insurrection, will the United States be able to adequately supply its troops using ground convoys when the sandstorms of spring arrive?

The next few months will be very interesting.

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