Friday, February 12, 2010
Iraq: Fearing the Phoenix?
Iraq's unprecedented oil expansion plan has neighboring Opec giants reacting with varying degrees of skepticism and concern. If Baghdad were to hit a lofty official capacity target of 12 million barrels per day by 2017, it would soar past Iran and rival top exporter Saudi Arabia. Achieving such a goal so quickly seems unlikely, but Iraqi flows of 6 million b/d appear achievable (EC Jan.29,p2). Even this more modest increase of 3.5 million b/d could raise tensions in regional capitals and at Opec headquarters in Vienna. How might an empowered Iraq alter the dynamics of the wider Middle East, where oil underpins politics -- and the Gulf region in particular?
In broad political terms, one worry is that a resurgent Iraq, pumped up as it becomes a top oil producer, might again aspire to project power in the region, perhaps reviving grievances over Kuwait's sovereignty or its borders with Iran, never properly defined and still a thorn in relations with Tehran. As seen in a spat over the Fakka oil well last December, border oil fields are potential flash points (EC Jan.15,p2).
After all, nationalism is a potent unifying strand in Iraq's otherwise divisive ethnic and sectarian politics. Although Iraqi patriotism is now being invoked to rebuild a sense of nationhood after US occupation, could it again be directed against external enemies, as it was by Saddam Hussein when invading Iran in 1980 and Kuwait in 1990?
That seems improbable. Petty disputes apart, Baghdad has no fundamental conflicts with any of its neighbors, who, given Iraq's belligerent past, would react swiftly to serious incitement. In practice, Iraq has no capacity for conventional warfare and its Saddam-era military machine is destroyed. Among the historic rivals for Gulf hegemony, Sunni Arab Saudi Arabia is impressively equipped and Shiite Iran is on the verge of nuclear breakout capability, while US bases in Kuwait are "a fundamental deterrent to both Iran and Iraq," notes Anthony Cordesman of the Center for Strategic and International Studies in Washington.
Analysts expect Iraq to remain a relatively weak power, with internal needs dominating its politics. "There is no vision to remake Iraq as a state which intimidates others," says Anas al-Tikriti at the Cordoba Foundation, a London think tank. "You'll find the opposite. Rather than rebuild the military, they want to rebuild the economy."
The bigger worry for onlookers is whether Iraq itself holds together and can resist outside pressures. Sunni alienation continues to fester, while Kurdish claims to the oil-rich Kirkuk region, if pressed, could torpedo the fragile unity of the new Iraqi state and draw in Turkey and Iran. And should Iraq emerge as an active US ally, might an anxious Iran meddle more politically or assert claims on border fields to disrupt the oil expansion? Saudi Arabia has largely ignored Baghdad since 2003, disdaining its Shiite-led governments and erecting a hi-tech border fence against Al-Qaeda infiltrators. A rapid rise in Iraqi oil supplies, however, would oblige Riyadh to reassess relations.
How events unfold will depend partly on Iraq's domestic politics -- and if the near term is uncertain ahead of March elections, Iraq's longer-term trajectory is utterly unpredictable. Says Cordesman, "The question is, do you end up with a Shiite-dominated Iraq which acts as a buffer state and is relatively neutral, or a more Arab Iraq, tied to the Gulf states, or an Iraq more influenced by Iran, or one too divided to play any role?" He adds that there is no realistic answer to such a question at this stage.
Making Waves
The upset caused by Iraq's expansion in the oil world will depend largely on the global supply-demand balance in the next four to five years. If industry forecasts are accurate, annual demand growth of around 1 million b/d, led by China and India, should leave room for additional Iraqi oil. The tricky issue then -- especially for Saudi Arabia -- becomes how and when to return Iraq to Opec's system of supply quotas (EC Feb.5,p5). Opec observers had always expected Riyadh, which gained market share by replacing lost volumes from Iran and Iraq -- first during their 1980-88 war and then during the Gulf crisis of 1990-91 -- to cut back to accommodate Iraq. But Riyadh may be reluctant to give any ground after hiking its capacity to 12.5 million b/d.
The quota debate will undoubtedly draw in Iran, which historically had parity with Iraq. Some Opec veterans see the issue coming to a head when Iraqi output hits about 4 million b/d, on par with Iran's stagnant capacity. If it feels humiliated by Baghdad's rise, Tehran could politicize negotiations at Opec.
Saudi Arabia may, however, welcome another stable regional oil producer that's able to help meet the world's thirst for fuel, since its own crude export capability may eventually be limited by surging domestic consumption, which is expected to rise sharply from rates of 2 million b/d in 2009. The kingdom has outlined field-by-field plans to push its own production capacity to 15 million b/d if needed, but this rate of output would tax reservoirs.
Sluggish world demand growth would cause more headaches. If higher Iraqi exports undermine global oil prices and threaten the Saudi budget, Riyadh could find itself forced into a major production cut. The Saudi purse is strained from ever-expanding outlays to create employment, which have seen state spending nearly double between 2003 and 2009, much of it recurrent outlays. The net result is that Riyadh will need a higher and higher oil price. This year the kingdom would need around $70 per barrel to balance the budget without a deficit, and by 2030 it could require as much as $165/bbl, say bankers who follow Saudi oil matters.
The caveat is that Iraq, too, has an interest in high oil prices to help rebuild its devastated economy and could temper the pace of its expansion if demand fails to keep up.
http://www.energyintel.com/DocumentDetail.asp?document_id=658344
