To the North there is also a smaller border with Jordan, and a much longer border with Syria. And to the East is a long border with Iran across mountainous terrain. The capital city is Baghdad, which lies in the centre of the Mesopotamia river basin, while other large cites are Mosul to the extreme north of the country and Basra in the south, close to Kuwait, which is its only port on the Persian Gulf. The Mesopotamia river basin was the cradle of civilization and is one of the oldest inhabited places on earth.
In more recent times the territory now occupied by Iraq was part of the Ottoman Empire before becoming a British protectorate after the First World War which marked the creation of the modern state of Iraq with its present borders. It is common knowledge that Iraq has the second-largest proven oil reserves in the world, with no less then 112bn barrels, and probable reserves of around 250bn barrels. But why is that Iraqi oil does not account for more than a fraction of global oil supply? In fact Iraq has made no more than 2.
5mn b/d of its oil available to the world market for almost 25 years, with the exception of a few spells when exports exceeded that. In order to understand the current situation of Iraqi as an oil industry and its future outlook, we need to go back to the past. Iraqi oil was discovered in 1927 when the first oil well was drilled in Kirkuk; but there was much delay in getting it to the world market through the Mediterranean due to conflicts of interest between the British and the French who held the UN mandates over Iraq and Syria respectively. Later, during the Second World War, Iraq revolted against the British.
Exports were again halted in the late 1940s during the first war in Palestine. Only after the discovery of Rumaila oil field in the southern part of Iraq in the early 1950s did exports start to rise and also after the crisis over nationalization in Iran. Iraq in the 1950s enjoyed a period of diversified and successful construction programs, covering many projects. Iraq then issued law No. 80 in 1961 that confiscated over 99% of Iraqi land not being explored by the international oil companies (IOCs) which had held the concessions since 1925. All exploration and development programs were stopped.
After the 17-30 July 1968 revolution, the relationship remained tense and culminated in the nationalization of the assets and operations of the Iraq Petroleum Company (IPC) in June 1972, and then all other foreign assets by 1975. Thanks to the first and second oil price increases of 1973 and 1979, Iraq utilized a good amount of its revenue in building its oil industry, both upstream and downstream, with proven oil reserves rising considerably due to some major discoveries of super-giant fields like Majnoon, Nahr Umar, Halfaiya, West Qurna, East Baghdad and others. Iraqi oil production peaked in 1979, with exports reaching around 3.
5mn b/d and production capacity of around 3. 8mn b/d. This continued until September 1980 when the 1980-88 Iraq-Iran war broke out. With oil prices at record highs, Iraq is on track to bring in $20 billion or more in oil revenue. That may sound like a lot of petrodollars, especially for a war-torn country with tremendous needs in infrastructure repair and services delivery. But the bad news is that very little, if any, of that money will actually be used in the countrys stalled reconstruction despite past lofty predictions that oil-rich Iraq would be financially self-sufficient by now.
However, the rebuilding of oil, electricity and other production sources is proceeding effectively. The International Monetary Fund (IMF) has loaned towards rebuilding Iraq. Iraq is producing less oil than before the US-led coalitions invasion which also means added pressure on other Gulf procedures to maintain and increase their production levels to meet a continuing and robust international demand for oil. After the invasion it was hoped that Iraq production could be raised. It is almost certain that if anything approaching this estimated had been reach, international oil prices would be less that the price level prevailing.
Dealing with Iraqs insurgency is a chief reason for the gap between oil revenues and improving living conditions. But another reason for the lag is a growing problem of income loss from smuggling and outright theft of the revenues. The all-important oil industry was constrained by limits imposed by the UN sanctions. But gradually the Iraq developed an extensive network of smuggling routes and illicit markets; indeed, the scale of these was such that by 2001, the Iraqis announced that they were no longer prepared to abide by the agreement with the UN and withdrew entirely from the international market.
But there was no disguising the decline which the Iraqi economy had undergone, especially during the previous 10 years. Accurate figures about the Iraqi economy are inevitably hard to come by. There were several bouts of hyperinflation during the 1990s, and the Iraqi dinar lost 90 per cent of its value during the decade. The economy contracted at an estimated average annual rate of 5 per cent during the same period. In 2002, inflation was 70 per cent, and the economy contracted by 6. 5 per cent.
Iraq also has a vast external debt in the region of US$200 billion, the majority of which is owed to Kuwait and Saudi Arabia (Luciani 1984). Hopes that the economy might grow in 2003 were dashed by both the extent of the rehabilitation needed by the oil industry and the consequences of the US-led war against Iraq. Oil is at the heart of the crisis that leads towards a US war against Iraq. For more than a hundred years, major powers have battled to control this enormous source of wealth and strategic power.
The major international oil companies, headquartered in the United States and the United Kingdom, are keen to regain control over Iraqs oil, lost with the nationalization in 1972. Few outside the industry understand just how high the stakes in Iraq really are and how much the history of the world oil industry is a history of power, national rivalry and military force. Since the occupation and invasion of Iraq in 2003, everything has changed and the companies have been scrambling to grab their share of the spoils.
In the new setting, with Washington running the show, friendly companies expect to gain most of the lucrative oil deals that will be worth hundreds of billions of dollars in profits in the coming decades. The new Iraqi constitution, greatly influenced by US advisors, contains language that guarantees a major role for foreign companies. Negotiators hope soon to complete deals on Production Sharing Agreements that will give the companies control over dozens of fields, including the fabled super-giant Majnoon, whose 21 billion barrels are worth $1.
5 trillion of todays prices. But no contracts could be signed until after elections and the formation of a new government, so that the Iraq side would appear legally legitimate. While regional governments angle for influence over the foreign oil contracts, most Iraqis favor continued control by a national company and the powerful oil workers union opposes de-nationalization. Iraqs political future is very much influx, but oil remains the central feature of the political landscape. According to Pelletiere (2001), oil was one of the reasons for the US-led Invasion of Iraq.
Competition over oil is creating tension between the United States, China and other countries who wanted to secure oil in case competition on the world market becomes too hard. In view of this, the US wants to reduce its dependence on oil from the Gulf and from Saudi Arabia in particular and the real answer is to have Iraqi crude. America does not want a very low price of oil and Iraq could quadruple its current level of oil production taking to eight million barrels a day by the end of the decade.
And much of it could be exported via the Eastern Mediterranean Sea, ending US dependence on oil passing through the Strait of Hormuz, a narrow waterway leading out of the Gulf. If there is a stable political future for Iraq then the price of oil will start coming down. It is believed that with more Iraqi oil flooding the market, OPEC members would fight among themselves as some try to increase their production too. A number of US states are oil producers, and a low price of oil these states would be hit hard.
One worrisome consequence of the inability to turn higher oil revenues into street-level improvements is the impact on the Iraqi publics faith in the countrys new government and direction. The insurgents know that oil is the lifeblood of the Iraqi economy, and that keeping it from improving daily life is key to building up the frustration and sense of helplessness and lack of faith in the new government all of which they are out to encourage, says Gal Luft, co director of the Institute for the Analysis of Global Security in Washington (Feld 2004).
Unfortunately, I dont see the government taking advantage of what should be a good time for an oil-producing country to make some money and move forward. As the country with the worlds second-largest known oil reserves, Iraq should be sitting pretty at a time of $60-a-barrel oil. But Iraqs potential has been tamped down by a continuing failure to invest in renewing the countrys decrepit oil infrastructure and an ill-conceived strategy of placing exports above oil-field modernization.
In addition, some experts say that the problem of petroleum-products smuggling and oil- revenue theft is increasing as the highly centralized and dictatorial regime of Saddam Hussein is replaced by one with less authoritative control and more room for tribal and partisan interests (Al-Chalabi 1980). In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption the continued impoverishment of populations, and abuses of political power.