Oil, oil everywhere, and not a drop…

…for the benefit of ordinary Iraqis.  That has been the situation since well before the fall of Saddam Hussein.   Moqtada al Sadr is reported (I read it in Juan Cole, who got it from Al Hayat) to be reviving the idea the Americans pushed in 2003/4 of distributing oil revenues to Iraqi citizens.  Though I have yet to hear Sarah Palin mention that she and every member of her family usually gets between $600 and $1500 in “rebate” (or should we call them welfare?) payments per year, the Alaskan system is widely praised. It makes citizens into shareholders in a $28 billion oil and gas fund and removes that money from what would otherwise likely be government control (which is the case, for example, in Texas, “fed” up as its governor claims to be).

This raises the interesting issue of the role of oil in the future of Iraq, in particular the future of national reconciliation.  Iraq has oodles of oil, possibly more in reserves than Saudi Arabia.  Most of that oil is in the Shia-populated south, where production costs are extremely low, but some of it is in the center (including near Baghdad) and in Kurdistan in the north.  Little of it is in Sunni-majority areas, which may however contain substantial gas reserves (exploration contracts have only recently been signed).

Current Iraqi production is around 2.4 barrels/day, marginally below the peak in Saddam Hussein’s time of 2.8 million barrels/day but increasing rapidly with the signature of 12 international contracts for oil field development.  If the contractual terms are fulfilled, Iraqi production would increase to 12 million barrels per day in 2017.  This would be a huge increase, likely the largest increase anywhere in the world in those years, as many fields (especially the cheaper producing ones) are in decline.

As a relatively low-cost, high-volume, high-reserve producer, Iraq would then have an interest in relatively moderate oil prices and maintaining higher volumes of exports.  Since the U.S. has been unwilling to constrain its own oil consumption in any serious way, and therefore needs oil production to be maximized worldwide, this will make Iraq a key player in world oil markets from the American perspective and a possible long-term partner, in somewhat the same way that Saudi Arabia has been.

It will also make Iraq fabulously wealthy.  Even the current $90+ oil is pouring revenue into Iraq’s coffers at substantially above the rate on which its current budget was calculated (virtually all government revenue in Iraq comes from oil at this point).  Oil at $100 per barrel or more in the future, with Iraqi production doubling, tripling, quadrupling and even eventually quintupling, is an extraordinary windfall. Even if production remains below 5 or 6 million barrels/day, Iraq will have mountains of cash.  And of course there is the possibility that prices might rise, rather than staying at $100 or less.

There are two politically sensitive issues attached to this magnificent growth in oil revenue (there are many other technical constraints that I won’t discuss):  how does Iraq get the oil to the international market?  what does Iraq do with the revenue?

Today most Iraqi oil goes out through Basra, where current infrastructure is limited to something like 2 million barrels/day, then through the Gulf and out to the Indian Ocean through the strait of Hormuz, a route exposed to Iran’s growing military capacity.  Some of the oil goes north to Turkey from Kurdistan. If Iraq is going to become an important and moderate partner in the international oil market, it is important that it enhance export capacity not subject to Iranian pressure.  This means settling current disputes with Kurdistan over oil production and exports and building new pipelines to the north and west, providing alternatives to the Gulf and more direct (and cheaper) access to Turkey and European markets.

What Iraq does with the oil revenue is also vitally important.  Already today the Kurdish leadership is hesitating to align itself with popular opinion in Kurdistan, which favors independence, at least in part because the 17 per cent share of Iraq’s total oil revenue (minus “sovereign expenses”) that Kurdistan gets today is likely a much better deal than the 100 per cent of its own oil revenue Kurdistan might get if it were independent (not to mention the many perils and costs of an attempt at independence).  Likewise, those Iraqi provinces that lack significant oil resources, like Sunni-majority Anbar in the west, are gratified to get their fair share of the oil revenue (which constitutionally goes to the provinces primarily in accordance with population). This has been an important factor in bringing Sunnis back into the political process.

So oil is already a cohesive political force in Iraq, one that would become even more so if at least a part of the revenue were distributed to the population, as Moqtada is apparently proposing.  The proposal would have the added benefit of limiting the resources available for corrupt distribution among government employees, a habit common in most oil-producing countries and one Iraq will find it hard to break. While there are other things Iraq could do–Norway puts invests its oil and gas revenue abroad and spends only the dividends, but does not distribute them to citizens on a per capita basis–redistribution of at least a substantial slice of oil revenue to Iraqi citizens would go a long way to convincing them, as it has Alaskans like Sarah Palin, that their state is a wonderful place to live.

There are of course many technical problems with distributing cash to Iraqis, not the least of which is that no one knows how many Iraqis there are.  A new census is needed, and new identity cards and procedures.  But none of those problems are insurmountable.

On the bigger issues, maybe a deal can be struck:  distribution of at least some oil revenue, provided major infrastructure investments are made to get the oil out of Iraq on routes not controlled by the Iranians.  That would be a fine test of the nationalist credentials Moqtada has  been flaunting lately.