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Oil and War

Is the projected war on Iraq intended to reinforce US domination of the energy resources of the Middle East? This explanation has such force that the Daily Telegraph featured a rebuttal by a former speechwriter for President Bush, David Frum. Frum, now a resident fellow at American Enterprise Institute, argued in late October that ‘Those Americans who worry most about oil tend to oppose action against Saddam, because they worry about the effects an Iraq war would have on Saudi Arabia.’ The former editor of the Wall St Journal went on: ‘Listen to the retired officials and distinguished public servants who have criticised President Bush’s Iraq policy–the Brent Scowcrofts and the James Bakers, the Anthony Zinnis and the Laurence Eagleburgers–and you will hear that word ‘stability’ over and over again. ‘Stability’ means oil.’

Frum dismissed the arguments that the war on Iraq would be for ‘access to oil’: ‘America can already freely purchase all the oil it wants. There has not been a credible threat to access to oil supplies since the Arab embargo of 1973-74 and there is no credible threat to access today. Saddam wants to sell more oil, not less.’

The war would not be ‘for cheaper oil’–‘a $12-$15 price [per barrel of oil] would close down the larger part of America’s domestic production and drive the country’s dependence on oil imports up from 50 per cent toward the two thirds or three quarters mark’.

So far Frum is persuasive. He begins to wobble in the closing stages of his argument, however, when he argues that the war would not be ‘for oil contracts’. The speechwriter asks rhetorically, ‘why would any government–and especially one as cynical as Mr [Alan] Simpson [MP] believes America’s to be–fight a war widely expected to cost $100 billion to gain contracts worth $40 billion’. $40bn being Frum’s estimate of the value of the Iraqi oil contracts currently held by Russian oil companies. $40 billion is ‘only a little more than half the gross state product of Arkansas,’ Frum points out. Does Alan Simpson MP ‘really imagine that any president, no matter how inebriated, would risk the lives of American soldiers–and his own political future–for that?’

There are two issues here–the value of Iraqi oil to US corporations, and the question of imperial cost/benefit analysis. Taking the second question first, throughout history imperial powers have expended more in wars of conquest and subjugation than could be earned from the colonies acquired or subdued. The US wars in Indochina are a staggering example of how disproportionate economic costs can be relative to perceived material benefits. The costs of empire are borne by society as a whole, while the benefits of empire are enjoyed by the influential few. Therefore, in general, for those who make policy–who share interests and viewpoints with those who hold domestic power–it is entirely rational to use the resources of society to secure the interests of the wealthy and powerful, even if expenditure far exceeds projected returns. Costs are socialised, benefits are privatised. That is the reality of our ‘free market’ economy.

Turning to the question of material benefit, there is one significant omission from Frum’s article: Iraq’s oil reserves. Iraq possesses the second largest proven oil reserves in the world after Saudi Arabia. The world’s proven oil reserves are roughly 1,000bn barrels of oil. Iraq’s proven reserves total 112bn barrels, over a tenth of all known oil supplies. As the Economist pointed out a few days before Frum’s article, ‘The big prize is control of the country’s oil reserves.’ While UN sanctions forbid foreigners from investing in the oilfields, ‘that has not stopped firms rushing to sign contracts in the hope of exploiting fields when sanctions are lifted.’ Oil companies from France, China, and India, even Royal Dutch/Shell have signed deals with Baghdad. ‘Lukoil, a Russian giant, has an enormous field holding down over 11 billion barrels of oil; the firm plans to invest $4 billion over the lifetime of the field to develop it.’

The contracts are generous: analysts at Deutsche Bank estimate that plausible rates of return are ‘of the order of 20%’.

Oil from the North Sea costs $3 to $4 a barrel to produce. According to John Teeling, ‘head of one of the few western companies to admit to working in Iraq’, Iraqi oil could cost as little as 97 cents per barrel to produce: ‘Ninety cents a barrel for oil that sells for $30–that’s the kind of business anyone would want to be in. A 97% profit margin–you can live with that,’ says Teeling.

The Economist remarks, ‘All of this must be bad news for those excluded from the party: the Americans.’ Figures in the US oil industry insist that a new regime would tear up existing contracts, while the head of the Iraqi National Congress, an umbrella opposition group, has openly declared that ‘American companies will have a big shot at Iraqi oil’–in the event of regime change. As the Economist points out, ‘It is hard to imagine that the American giants would not find some way to get a piece of the action in Iraq–or ‘Klondike on the Shatt al Arab’ as some call it–post-Saddam.’

Iraq has always been a key player in the Middle East oil market, and was the original source of Middle Eastern oil. In fact, when Standard Oil of California secured the first Western oil concession in Saudi Arabia in 1932, a much bigger and more powerful consortium was on the scene to try to block the deal–the Iraq Petroleum Company (IPC). The British-dominated IPC did not believe that oil would be found in Saudi Arabia (the general consensus of opinion at the time), and they already had more oil than they knew how to handle in Iraq, so they allowed the US a toe-hold in the Arabian peninsula. The IPC, made up of the fore-runner companies to BP, Shell, Total of France, and Exxon, actually suppressed news of oil discoveries in Iraq and held down oil production by various devices in order to keep prices up. These restrictive practices, begun in the 1930s, continued into the 1960s, as the US Senate Subcommittee on Multinational Corporations found in 1974. An internal IPC survey document from 1967 made clear that the company had discovered vast oil reservoirs, but had ‘plugged these wells and did not classify them at all because the availability of such information would have made the companies’ bargaining position with Iraq more troublesome.’

Following a modest nationalisation law in 1961, which removed IPC’s oil rights in those areas in which it was not actually producing oil, an official in the US State Department concluded that ‘A fairly substantial case could be made (particularly in arbitration) that IPC has followed a ‘dog in the manger’ policy in Iraq, excluding or swallowing up all competitors, while at the same time governing its production in accordance with the overall world-wide interests of the participating companies and not solely in accordance with the interests of Iraq’. Andreas Lowenfeld noted that ‘This of course has been one of the principal charges of the government of Iraq against IPC’.

The conflict between the corporations and the government came to a head in 1972, when Iraq nationalised the property of the IPC. After a painful battle, the IPC finally signed the nationalisation agreement on February 28, 1973, receiving compensation from Baghdad. Now, the surviving members of the IPC cartel, three of the world’s largest public companies, BP, Shell, and ExxonMobil, have indicated that they may exploit the fall of Saddam Hussein with a fight for their old possessions in Iraq, arguing that that the compensation/nationalisation deal they agreed to in 1973 was signed under duress. This could present an incoming Iraqi government with a huge legal compensation case at a very awkward moment.

Professor Thomas Walde, formerly the principal UN interregional adviser on oil and gas law, has observed of the oil companies, ‘If I were their adviser, I would develop this into a bargaining chip with the new government. It would play a role in the race for getting new titles.’ So there are great prizes at stake, both in terms of contracts for reconstructing the Iraqi oil industry, and for developing new concessions in the original source of Middle Eastern oil–with phenomenal profits on the horizon. There are other prizes also.

In 1958, British Foreign Secretary Selwyn Lloyd summarised British interests in the Gulf thus:

(a) to ensure free access for Britain and other Western countries to oil products produced in states bordering the Gulf;

(b) to ensure the continued availability of that oil on favourable terms and for sterling; and to maintain suitable arrangements for the investment of the surplus revenues of Kuwait;

(c) to bar the spread of Communism and pseudo-Communism in the area and subsequently beyond; and, as a pre-condition of this, to defend the area against the brand of Arab nationalism under cover of which the Soviet Government at present prefers to advance.

The physical supply and pricing of oil were central concerns, true, but so also was the investment of Kuwait’s share of oil profits in British financial markets. Declassified US documents note that ‘the UK asserts that its financial stability would be seriously threatened if the petroleum from Kuwait and the Persian Gulf area were not available to the UK on reasonable terms, if the UK were deprived of the large investments made by that area in the UK and if sterling were deprived of the support provided by Persian Gulf oil.’

This is not a war for oil. It is a war to control the profits that flow from oil.

MILAN RAI is author of War Plan Iraq: Ten Reasons Against War (Verso, 2002) and a member of Active Resistance to the Roots of War (Arrow). He is also co-founder of Voices in the Wilderness UK, which has worked for the lifting of UN sanctions in Iraq.

 

 

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