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The great rush for black gold

Ranjit Singh Kalha | March 22, 2003

Early on  March 20 morning, as the sun was beginning to peep through the clouds, the people of Baghdad awoke to gunfire and the sound of Cruise missiles hitting their targets.

For the people of Baghdad this is not an unfamiliar scenario, for the last decade or so this has been their life. The thud of US missiles indicated that the second Gulf War had begun. For several weeks the people had witnessed the near-total impasse in the Security Council with protagonists arguing their case with fervour, but to no avail.

While France, supported by Germany, Russia and China, argued against military action and claimed majority support within the UNSC, the US and UK supported by Spain stated they could not risk weapons of mass destruction being allowed to  remain in Saddam's hands.

Till the last, the  US tried to induce Saddam to leave Iraq, thereby opening the way for "peaceful" occupation. Bahrain even offered a "safe haven". Saddam refused to oblige. The war, with all its ramifications, political and economic, was on. The great black gold rush had begun in earnest.

But why should the US/UK governments take such huge political risks against a rising tide of international public opinion as evidenced by the unprecedented peace marches and protests the world over? Why is the control of Iraqi oil so important?

It is conservatively estimated that Iraq's proven oil resources are equivalent to 115 billion barrels and it has an additional 215 billion barrels in yet-to-be-explored deposits. At present, that is only second to Saudi reserves estimated at 260 billion barrels.

However, according to an OPEC study, the life of Iraqi oil reserves is likely to last over 600 years. Contrast this to Saudi oil reserves, which are not expected to last beyond this century.

Press reports indicate that 417 new oil wells are likely to be commissioned and Iraq could in five years' time be pumping something like 10 million barrels per day. Industrialised countries consume nearly 50 million barrels per day and the US accounts for nearly two-fifths  of this consumption.

Official forecasts predict that the US will require another nine million barrels per day by the year 2020. Only Iraqi oil can meet this huge demand and cover current US imports for almost a century. It is a strategic asset and it is now well recognised that it should be in "safe hands".

Assuming that Saddam is removed, what happens to this huge wealth? If, as expected, there is little resistance, a new black gold rush will begin and global oil companies are unlikely to wait that much longer.

Each would want a slice of the cake. Saddam had signed deals worth several billions with French, Russian, and Chinese companies. Is it any wonder that these countries were at the forefront of the countries in the Security Council seeking to delay action?  As the US and its allies invade Iraq, the US and UK oil companies would without doubt benefit.

There is already talk of privatisation of the Iraqi oil industry. The big issue for countries other than the US and UK would be the validity of deals they have contracted with Saddam's Iraq. This issue still remains unresolved.

If military action is swift and concluded quickly and assuming that there is no sabotage of the oil fields, the price of the oil will probably rise for the short term from present levels before settling down.

This is because the Iraqi oil fields at the minimum would require to be shut down for a few months to check for explosives and other hazards before local and foreign experts could get them to work again. This perception of a shortfall is no doubt aided by the fact that inventories in industrialised countries are low. OCED stocks stood at 67 million barrels above normal at the start of operation Desert Fox.

Today, they are 123 million barrels below normal. Demand in the US is high because of severe cold weather, the US being the world's largest consumer of heating oil.

But what happens to India in the short term? Every rise of $ 1 in the oil price inflates the oil import bill substantially.  Though India has no Administered Price Mechanism any longer, the Indian Government is obviously nudging the oil PSUs to keep increases within limits.

Under the APM system the government used to absorb the difference between global and domestic prices of crude and thereby shelter the common man from rising prices. Hence, either the oil companies or the Government itself will subsidise the increased prices in the short run.

Another problem would be that ONGC exposure in Iraq would have to be re-negotiated. For the short-term, however, apart from local difficulties, India should be able to manage without major hiccups.

In any case, the Saudis have a spare capacity and could be persuaded along with other Gulf countries to make up any shortfall and stabilise prices. And once Iraqi oil begins to flow, prices are likely to fall substantially.

Thus , a short sharp war will probably benefit the global economy, freed as it would be of uncertainties. This is the great US hope. It is also India's best option in case there is a conflict.

The moot point is what happens if military action is not swiftly completed, that the oil fields are sabotaged and sporadic resistance continues for say six months.

According to press leaks by the US Administration sources, the US is likely to occupy the oil fields immediately after the commencement of hostilities to defer any such probability of sabotage. This might not happen considering the large area to be covered and the preparedness of the Iraqis to anticipate just such an action.

They could set fire to them, as they did in Kuwait at the end of the first Gulf War, causing severe health and environmental problems. The eventual cost of a clean-up would be enormous, with some estimates having it as much as  $50 billion.

Some US companies in Houston who have expertise in this field have already been alerted in preparation, but it would still take a considerable time before normalcy returns.

On the other hand, should Saddam succeed in sabotaging not only Iraqi oil fields, but also those of his neighbours, as he has threatened, an estimated major shortfall of about six million barrels per day is foreseeable (about eight per cent of the world's consumption).

This could have major repercussions and send the global economy into recession. It should also be kept in mind that most Iraqi oil fields are east of the Euphrates and close to the Iranian border.

Turkey is already negotiating with the US about its interests in Northern Iraq , including the stationing of Turkish troops and this might include Kirkuk the major oil producing centre in the north. It is pertinent to note that Turkey was the colonial power in this part of the world and was expelled only as recently as the end of  World War I.

In such a scenario how will India be affected ?

India imports a significant amount of crude oil from Iraq. Iraqi crude is one of the best grades of crude to get optimal results from  IOC  refineries. Alternatives would have been found. In the absence of the APM the Government is faced with a dilemma.

Subsidising the cost for a long period would put the union budget under severe strain, there by throwing stability out of the window.

Economists estimate that every  $1 per barrel rise in the price of oil means that inflation in India goes up by half a percentage point. And rising inflation will naturally add to the difficulties already being faced by the common man.

In case the government decides not to absorb the additional cost and passes it on to the consumer, there is a high political price to pay.

The next general elections are not that far away and important state elections are due later this year. Any economic distress is bound to be politicised and the opposition would only be too glad to take advantage. If the conflict is prolonged and the situation not stabilised quickly, as much as 1.5 per cent of India's GDP could be wiped out.

Thus, as the US sets out to intervene in Iraq, the economic and political risks are enormous for countries such as India and destabilisation in our immediate neighbourhood has considerable additional costs, none of our own making.

Which way the events will unfold only time can tell. All of us in India will be hoping that whichever way the events turn out, peace and stability is restored quickly and that the acutely suffering Iraqi people are able to live their lives once again with peace, dignity and honour.

(The author was India's Ambassador to Iraq between 1992-1994. He served as Secretary in the Ministry of External Affairs between 1998-2002)

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Number of User Comments: 4

Sub: only god can save us...

This is True. There is one important thing we need to take into account. Once US/UK gain oil reservers of Iraq, they can infuluence the ...

Posted by Adi

Sub: Th effect of oil prices on India

The oil prices in the past week have dropped by more than 33%. Why cant India buy at least 50% of its requirements for the ...

Posted by Prem

Sub: educative article

an educative article.based on the rush of black gold. scope has been covered very well. The black gold is not the only reason for US ...

Posted by anurag

Sub: a load of hot air

If Sept 11 had not happened it is quite unlikely this regime change war would have happened. Oil is a marginal issue, not the main ...

Posted by Sriram


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