The invasion of Iraq and rising oil prices

June 12, 2008

Ever had the feeling at times that the media collectively avoid mentioning the obvious because it may offend the great and the powerful? I've had the feeling all my life but thankfully because I'm part of that media I've often had the chance to raise issues that others avoid like poison.

One of the issues that is talked about at every possible level of society these days is oil prices. Nobody needs to be told why when crude is selling at $US133 a barrel for 2013 delivery. And I'm here to tell you that the main reason behind the rise in prices is the American invasion of Iraq.

Some background is necessary here. About a third of the world's oil is supplied by countries which belong to the Organisation of Petroleum Exporting Countries, better known as Opec. It is a permanent inter-governmental body formed in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

Nine other countries joined later: Qatar (1961); Indonesia (1962); Libya (1962); the United Arab Emirates (Abu Dhabi joined in 1967, the UAE was formed in 1971); Algeria (1969); Nigeria (1971); Ecuador (1973) (which suspended its membership from December 1992 to October 2007); Angola (2007) and Gabon (1975–1994). Opec was initially headquartered in Geneva and later moved to Vienna in September, 1965.

Each member of Opec is given a quota for its oil production. Iran has always had the same quota as Iraq due to a compromise worked out by the organisation due to the bitter enmity between the two countries.

After Iraq invaded Kuwait in August 1990, the oil income of both countries was badly affected - Kuwait because it had little or nothing to sell due to the damage caused to oil installations by Iraqi troops and Iraq as it was subjected to trade sanctions by the UN and could not sell its oil. Kuwait slowly got back to full production after the US led a war to evict Iraq. But Iraq was hit with crippling UN sanctions after the war and never reached pre-war levels of production after that. Prior to the war, Iraq was producing 3.2 million barrels a day.

When Iraq invaded Kuwait on August 2, 1990, all exports were halted. Production was limited to supplying local refineries with no more than 300,000 barrels per day. Until December 1997, actual production hovered around 500,000 to 600,000 barrels per day due to the sanctions.

In the period between August 1990 and March 2003, the maximum production that Iraq achieved was 2.8 million barrels a day; it was allowed to sell some portion under an UN oil for food scheme which was initiated in 1996. There was a ceiling on production but that was lifted in 1999 and it was after that Iraq reached the 2.8mb/d figure.

Five countries from among the Opec cartel have sufficient reserves to act as so-called swing producers - that is, increase or decrease the amount they pump to the extent that the world oil price is affected. These are Saudi Arabia, Iraq, Iran, the United Arab Emirates and Kuwait. (In the UAE, the state or emirate producing practically all the oil is Abu Dhabi).

While countries like Iran, Kuwait, the UAE and Saudi Arabia regularly pump more than their quota, there are signs that other countries like Indonesia and Venezuela cannot now pump more than their quotas. They are unable to do so due to depleting reserves.

Worldwide recoverable oil reserves, both discovered and undiscovered, have been estimated at around 1.8 trillion barrels; in 2005, British Petroleum put the world oil reserves lower at 1150 billion. At the rate of production of 30 billion barrels per annum, this means enough oil for 38 more years though as the oil fields are depleted, the rate of production drops. It is a sobering thought - and world oil usage is not decreasing.

Data from BP shows that oil consumption in 2007 was a shade over 31 billion barrels. And not all of this was produced in 2007 as world production only came to a shade under 30 billion barrels - the rest was used by various countries from their own strategic reserves.

The US is the country which consumes the most oil - one-quarter of the world consumption. And the US department of defence is the single largest entity in terms of consumption; only 35 countries consume more oil than the DoD.

In this context it becomes important to look at Iraq's production as a sizeable amount of the oil produced in that country since March 2003 has been used by US forces. At the time of the invasion, Iraq was pumping 2.3 million barrels of oil a day. After the invasion, this fell drastically. Iraq did not have enough oil to meet even its own needs after the invasion forces had taken their share.

By 2007, Iraq had limped back to a figure of 2.14 million barrels a day. About half of this is consumed by the invasion forces. The rest is used within Iraq. But it is not enough - since June 2003, Iraq has been importing gasoline, gas oil, LPG and kerosene, costing around $US500 million a month.

Let's remember that in 2007, Iran pumped an average of 4.4 million barrels a day. It had an Opec quota of 4.1 million barrels per day - which meant that Iraq had the same quota and could have pumped as much. But Iraq could not - it did not have the capacity due to the damage wrought to oil wells after the invasion. Its oil industry has never recovered even to pre-invasion levels.

In short, Iraq, the country with the second highest known oil reserves (115 billion barrels), has for a long time lacked the technology to pump as much oil as it can. If you are looking for the major source of world shortage, there it is. And what's caused it? The American and other troops; 150,000 armed Americans are still in the country.

Why then is the shortage in oil supply, which is a major factor contributing to the high prices, always blamed only on the rising consumption in India and China? The American invasion of Iraq has produced a disastrous situation in the oil industry there - and additionally, there is a huge surge in consumption with all the additional guzzling by the invasion forces.

Why does no publication look at all these figures - which are openly available on the internet (I'm no oil industry veteran) - and draw the only conclusion that is possible? Why are people scared to ask the Americans to get out of Iraq and stop consuming oil that could be sold on the world market - and have an impact on world prices? Why does nobody tell the Americans that if Iraq was able to repair its oil installations and start exploring for reserves again, there would be a noticeable impact on the price?