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Dr Dipak Basu
When the price of crude petroleum has reached US $50 per barrel, the usual blame game has pointed out that growing demands from China and India are the factors responsible. China'sconsumption of energy has not gone up but declined as a percentage of its Gross Domestic Product. That has raised questions regarding the reliability of China'sclaim of high rate of growth of its economy. India with its deficits in the trade balance is not in a position to create massive demands in the international crude oil market. Thus, the real reason lies somewhere else, says Dr Dipak Basu.
The real reason for the invasion of Iraq is now clear. The purpose is to secure the supply of crude petroleum from the vast oilfields of Iraq. Iraq ranks only second to Saudi Arabia for its oil resources, and was the world'ssecond largest oil exporter before the Iran-Iraq war broke out in 1980. The US has always been a key importer of Iraqi oil. Even under the UN sanctions, US companies imported some 750,000 barrels per day (bpd) from Iraq until the end of 2002.
Based on current estimates, Iraq'soil reserves stand at about 115 billion barrels, equivalent to the total oil reserves of US, Canada, Mexico, western Europe, Australia, New Zealand, China and the whole of Asia. Now that the US has succeeded in ousting President Saddam Hussein, Iraqi oil is set to start flowing once again. US occupation administration hopes that Iraq would soon be able to export about 600-700,000 barrels a day, mostly to the US, in addition to 300-400,000 barrels produced for domestic consumption. According to plans designed by the occupying powers, Iraqi oil revenues will be channelled into a trust fund controlled by the US and the UK. Increased price of crude oil will finance the reconstruction of Iraq from its own export revenues. There will be no need for the US to provide any financial support to Iraq. In addition, Iraq will provide a secure supply of crude oil to determine in course of time the international price of crude oil, thus effectively controlling the financial future of Russia, a major exporter of crude oil.
Root of US Ambitions are Iraq'sOil-fields
The roots of US ambitions in Iraq go back to the aftermath of World War I, which put an end to Turkish presence in the region. Then the Sykes-Picot agreement, signed by the British and the French, re-carved the Middle East creating new entities ruled either directly by the colonialist powers or by puppet regimes. Despite the underlying differences, Britain and France agreed to divide the Fertile Crescent encompassing Iraq, Syria, Palestine, Lebanon and Jordan, between them as areas of influence. France got Lebanon and Syria, while Palestine, Jordan, and the two southern provinces of Iraq-Baghdad and Basra went to Britain. However, the status of the province of Mosul, an integral part of Iraq for thousands of years, remained unresolved. Though it was part of the French sphere of influence, as agreed, the British were determined to keep Mosul within their new Iraq colony.
Immediately after Turkey was defeated, the British army occupied Mosul and the imperialist struggle between Britain and France over Mosul heralded the beginnings of US ambitions in Iraq. The apparent cause of rivalry between Britain and France, and at a later stage the US, over Mosul was its known but largely undeveloped oil resources. Though its efforts in World War I were very limited, the US, emerging as a super power, was keen to ensure that its economic and political interests were taken into account in the post-war world of the Middle East, as it came to be called by the imperialist powers. Oil was at the top of these concerns as the importance of the Gulf region was mounting in view of its huge oil reserves.
US Involvement in Iraq'sOil
Faced with the British and French domination over the region'shuge resources, the US at first demanded an ?open door? policy allowing US companies to freely negotiate oil contracts with the puppet monarchy of King Faisal, whom the British had installed in Iraq. In 1927, major oil explorations were undertaken and huge oil deposits were discovered in the Mosul province, which fuelled the rivalry among competing colonialist oil companies even further. However, a settlement was arranged and Iraqi oil was divided up into five portions?23.75 per cent for each of several companies from Britain, France, Holland, and the United States. The Iraqi people were left with virtually nothing of their oil wealth, and this unfair situation continued until 1958 when the Hashemite monarchy was toppled in a military coup.
The Iraqi petroleum company, shared by British Petroleum, Shell, Mobil and Standard Oil of New Jersey (Exxon) was established. Whithin a few years, this company had a total monopoly of Iraqi oil production. Yet, the US oil companies and their government in Washington were not satisfied since their target was to achieve complete control of the Middle East oil by displacing the British.
Growing US Role
Following the end of World War II, the British Empire was greatly weakened by the war in which it lost key colonies in Asia. On the other hand, the US grew increasingly powerful throughout the world. The administrations of Presidents Franklin Roosevelt and Harry Truman, dominated by big banking, oil and other corporate interests, were determined to restructure the post-was world to ensure US domination. Thus, one of the key elements of the US domination strategy was aimed at controlling global resources, particularly oil. Within this context, the US threw its full weight behind the Shah of Iran who was one of its closest allies in the region. By mid 1950, US influence in Iraq was almost as powerful as that of Britain, which was the actual colonising force on the ground. In 1955 the Baghdad Pact, including in addition to Iraq, Turkey, Pakistan, Iran and the UK was set up to counter the rise of Arab and other liberation movements in the Middle East and Asia.
Future of Crude Oil Market and Iraq
It is clear that the amount of oil that Iraq will bring to the market will influence the Russian economy, the price Americans pay for gasoline, the stability of Saudi Arabia, Iran'sfuture and last but not the least, the strength and effectiveness of OPEC.
Iraq'splanned return as a key player in the world oil market after 13 years of UN sanctions has prompted concerns within OPEC, with some analysts warning that Iraq could kill off OPEC countries, if it decides to leave the cartel in a bid to produce as much oil as it can outside the quota system.
Saudi Arabia has every reason to be concerned. Although it is viewed as a country synonymous with wealth, it is however deep in debt. In a few years, when Iraq begins to produce large quantities of oil for export, it may be just enough to send the price down and the Saudi economy into even a deeper decline.
It is obvious that any decision on how Iraq will operate in the oil industry will be tied to American interests in Iraq, in particular, its influence as a regional power and its potential role as a major oil producer. A massive expansion of infrastructure and investment as well as a stable political environment will be required to increase Iraq'soil-producing capacity. It is not a question of if, but when Iraq will dictate the state of world oil affairs, increasing dependence on oil imports will be seen.
US Dependency on Imported Crude
A recent study by the US Energy Information Administration (EIA) predicted that world demand for oil would reach 112 million barrels per day (bpd) by the year 2020. This demand could only be supplied by the major oil producers including Iraq, Saudi Arabia, Iran, Kuwait, the United Arab Emirates, and Venezuela. In 2001 the total global crude oil production was estimated at 76.8 million bpd.
The US is the world'smajor oil consumer with a per capita consumption of 28 barrels a year as compared to only two barrels a year for each Chinese citizen. Such statistics emphasise the fact that the US is more dependent than ever on imported oil. US oil imports, which accounted for about one-third of the total US petroleum needs in 1973, jumped to 60 per cent of US oil needs in 2002.
This big increase in US oil imports was necessitated by rapid economic growth. In the year 2000, the US consumed 19.7 million bpd of petroleum (crude oil plus petroleum products or about one-quarter of the total world oil production). The forecasts indicate that US demand for oil will grow to 26.7 million bpd by the year 2020 (EIA Annual Energy Outlook, 2002).
However, the dramatic events that shocked the world in recent years have focused attention on sources of US imported oil. In 2001, the US imported 54 per cent of its oil needs, with the average of US petroleum imports reaching 10.6 million bpd. The balance of supply was obtainable from domestic oil production.
Canada, Saudi Arabia and Venezeula are the top three sources of US oil imports. As based on imports of 10.6 million bpd, the total cost of US oil imports averaged $233 million per day. In 2001 the total world crude oil production reached an estimated 76.8 million barrels per day.
About 48 per cent of US crude oil imports were supplied by the western hemisphere (19 per cent from South African States, 15 per cent from Mexico and 14 per cent from Canada) while 30 per cent was imported from the Gulf region (35 per cent from Kuwait, 18 per cent from Saudi Arabia and 9 per cent from Iraq).
Almost 65 per cent or 3.7 billion barrels of the total quantity of oil and natural gas liquids consumed by the US (6.5 billion) were imported. Of the 2.8 billion barrels (44 per cent) produced domestically, 2.1 billion barrels were of crude oil and 0.7 billion barrels were of natural gas/liquids.
Conclusion
The US had an estimated 21.8 billion barrels of reserves, equivalent to only 2 per cent of the total proven global reserves, in the year 2001. Those reserves would last for just 9.5 years at the current rates of production. As production rates decline, gradually new reserves would be discovered which would guarantee that no abrupt end of domestic US oil production occurs. On November 13, 2001, President George W. Bush ordered the SPR (Strategic Petroleum Reserve) to be filled to approximately 700 million barrels. Today the SPR has the capacity to hold 727 million barrels. The SPR in US is the largest stockpile of government-owned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the US economy. Since 2001, continuous supplies to the SPR have created increasing demands for crude oil. However, even when crude oil price has reached US $50 per barrel, the US Government has no intention to release some amounts from the SPR to lower the speculative upward movement of crude oil price in the world market. The reason is that the high price of crude oil can serve some short run purpose of the US Government very well.
It is the US, not China or India, that will need massive imports of crude oil. The occupation of Iraq serves that purpose effectively. Increase in crude oil prices can guarantee that there will be increasing investments in oil explorations in Alaska and other difficult areas. The massive profits of the US oil companies because of high price of crude oil will provide finance to bridge the gap in the US budget deficits caused by the cost of invasion and occupation of Iraq and by the massive tax reduction for the rich American. The US economy will be protected at the same time by the price interventions on retail gasoline prices, which are in force since 1974. Whenever needed, the US Government can release some crude oil from its own SPR for the domestic market to lower the retail prices and keep the American consumers happy.
Increased demands for crude oil mean increased demands for US dollar, whose value is on decline recently due to increasing attractiveness of the Euro. Increased value of US dollar would increase the ability of the US to import more and to attract more foreign investments in USA to cover the trade deficits of the US. Unlike other countries, there is no need for USA to export more in order to import more. The status of the US dollar as the sole means of payment in the crude oil market of the world means USA only needs to print more dollars to keep its value intact and in order to be able to import as it likes. The increasing price of crude oil would make sure of that.
(The author is professor in International Economics, Nagasaki University, Nagasaki-850-8506, Japan
e-mail: Bose66@hotmail.com)
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