Did the Iraq War Cause High Oil Prices?

An oil economics specialist, Mamdouh Salameh, who advises the World Bank and the UN Industrial Development Organisation, contends that oil prices would be at less than 1/3 of their current level had the US not invaded iraq.

We’ve noted before that Iraqi reserves somehow gets overlooked, which is odd. Iraq’s production has fallen further than Saudi Arabia’s has, but that fact is not often mentioned in polite company.

Iraq is somewhere between number one and number three in total reserves, depending on whom you believe. The Iraqis claim that new exploration brings the country proven reserves to 350 billion barrels, which would put it ahead of Saudi Arabia’s 284 billion barrels. This contention, as convenient as it sounds, might well be true because Iraq is underexplored.

Now even if Iraq does have this much oil, it would take quite some time to develop it. Iraq’s oil industry suffered more than a decade of underinvestment during the embargo, and the decrepit infrastructure has been subject to attacks.

Note that Salameh does not consider the possibility that reserves may be higher than previously thought; he simply goes back to status quo ante.

From the Sydney Morning Herald (hat tip John Robb):

Mamdouh Salameh believes the oil price would now be no more than $US40 a barrel, less than a third of the current price, if not for the Iraq war.

An oil economist adviser to the World Bank and the UN Industrial Development Organisation, Dr Salameh says that among the world’s biggest oil producers, Iraq alone has enough reserves to increase flow substantially. Production in eight others – the United States, Canada, Iran, Indonesia, Russia, Britain, Norway and Mexico – has peaked, he says, while China and Saudia Arabia, the remaining two, are nearing the point of decline. Before the war, Saddam Hussein’s regime pumped 3.5 million barrels of oil a day, but this has fallen to just 2 million barrels.

Salameh told a British parliamentary committee last month that Iraq had offered the US a deal, three years before the war, that would have opened 10 new giant oil fields on “generous” terms, in return for lifting sanctions. “This would certainly have prevented the steep rise of the oil price,” he said. “But the US had a different idea. It planned to occupy Iraq and annex its oil.”

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  1. Melancholy Korean

    Irony of ironies of ironies. Murdoch justified the Iraq war by saying we would have 20 dollar oil once again.

    Hmm… Perhaps he should have stuck to his knitting rather than commented on future price action in the oil markets–his knitting, i.e., turning great newspapers into tabloid trash, and in the process making us all more stupid, vulgar, and cheap.

  2. Anonymous

    The borrowed money for the Iraq and Afghanistan wars by the holder of the worlds fiat reserve currency in a global fractional reserve banking system has given us bubbles all over the world in almost every country which are now deflating with the exception so far of the US bond market and commodities. Crank interest rates up blow the bond market and this little problem goes away. Just like Volcker had to did.

  3. DownSouth

    Someone here on naked capatalism posted a link the other day to a technical review by World Oil that gives some indication as to just how vast Iraq’s oil producing potential might be…


    If things had gone as George Bush planned, Iraq would by now be well along its way in becoming one of the world’s premier oil producers. Those extra millions of barrels per day of Iraqi production would certainly have a dampening effect on world oil prices.

    The literary double of George Bush, and indeed a large number of his compatriots, is to be found in the character of Rodya Raskolnikov, Dostoevsky’s principal protagonist in “Crime and Punishment,” .

    Raskolnikov is an arrogant, proud young man who plans and executes the robbery and murder of an old pawn broker. With the money, he explains, “I only wanted to put myself into an independent position, to take the first step, to obtain means.” And once he had those means, he “would have done hundreds, thousands of good deeds.” Raskolnikov had written and published a paper explaining how there are “exceptional persons” to whom the normal laws and rules do not apply. He, of course, believed himeself to be amongst those exceptional persons.

    The robbery, however, did not work out as planned. “Life had stepped into the place of theory,” as Dostoevsky put it. The old woman’s sister surprised him during the course of the murder so instead of a single murder it ended up being a double murder. A couple of clients arrived and trapped Roskolnikov in the apartment. He managed to escape, but bungled the robbery, leaving most of the old woman’s money and valuables behind. And then as the investigation began to close in upon him and he confessed to his family and closest intimates, their reaction was not what he anticipated. Quite the contrary, they were horrified.

    However, there is never any remorse or repentance on Raskolnikov’s part. He is defiant to the end: “That I killed a vile noxious insect, an old pawnbroker woman, of use to no one! Killing her was atonement for forty sins. She was sucking the life out of poor people.”

    And as Dostoevsky further explains: “But he judged himself severely, and his exasperated conscience found no particularly terrible fault in his past, except a simple blunder which might happen to anyone. He was ashamed just because he, Raskolnikov, had so hopelessly, stupidly come to grief through some decree of blind fate, and must humble himself and submit to ‘the idiocy’ of a sentence, if he were anyhow to be at peace.”

    Or as Raskolnikov himself put it: “If I had succeeded I should have been crowned with glory, but now I am trapped.”

  4. proton

    The destruction of oil production of Iraq has no doubt played an important role in the run-up of oil price. While I am not an oil economist, neither can I compute how much of the price increase is due to Iraq-USA war, I am not ignorant of the supply-demand dynamics.

    What’s surprising is that there has been little discussion of this in American media. Thanks for bringing this subject up.

  5. roger

    I love this post!

    The twofold effect of the Fed pumping money into the financial sector and the security premium seems to me to correlate, with astonishing obviousness, to the run up in oil prices. There is almost a steplock – take last week, when the news that China seemed willing to allow some “demand destruction” of oil consumption was trumped by the news that Israel was publicizing a military exercise aimed at a possible bombing of Iran. The futures market in oil is a bet, after all. It makes sense to bet that oil will go higher if indications are that a general conflict involving all the big oil producers is imminent. Bombing Iran doesn’t just mean trouble for Iran, it will unleash violence throughout the middle east. In the same way, betting oil prices will get higher as the insurgency in Iraq gained a foothold by the end of 2003 also seems like a no-brainer. All the cooked numbers displayed before the invasion – the cost of it (which Wolfowitz testified would be 10 billion dollars tops), the estimate of increased oil production (instead of the decrease that happened) – showed the market that nobody really was in control in the heart of the Middle East. In that situation, bet that oil prices will go up. It is a safe bet.

    Moreover, there is a lesson here about using foreign policy levers correctly. It should be obvious by this point what the Bush administration should have done in 2001. It should have welcomed the feelers from Iran. It should have taken apart the double sanction regime as a result. Instead of hostility towards Iran for being on the same side the U.S. was in Afghanistan, the rewards should have gotten bigger. Similarly, this was a perfect time to pour money for infrastructure into Northern Iraq – the Kurdish free zone. The Iraqi elite and military, trapped into a prisonhouse alliance with Saddam Hussein, would have seen the last door close with these actions – in particular, a closeness between Iraq’s old enemy, Iran, and the U.S. – and the inevitable disintegration of the dictatorship would accelerate – especially with the lure of the lifting of sanctions. True, the introduction of “free enterprise” by way of American military might – one of the reasons trumpeted by the pro-war lobby in 2003 – would never have happened. Certain American corporations, namely Halliburton, having no sudden influx of money, might have crashed. But oil prices would have gone up rationally, in response to higher production costs and increasing demand. The change in the political complexion of Iraq would doubtless have been bloody, but far far less bloody than the insurgency, and Iraq’s oil ministry, a very good one, would, under a new regime, have been able to borrow, on the international market the money needed to modernize the oil fields. Normality, in other words, instead of failed neo-colonialist change would have been the order of the day.

    The opportunity costs of the invasion have to include the oil price jumps.

  6. Charles N. Steele

    No doubt very important, but increased demand from Asia (esp. China, oil consumption growing more than 7% annually for 15 years) seems crucial, and the more influential factor.

  7. Anonymous

    A barrel of oil could never cost $40 when the US$ is worth 70 cents. This talk about ‘what if’ can lose you a fortune in these markets.

  8. Anonymous

    Forgive me for being unabashedly contrarian here, but why is it a foregone conclusion that Bush sent troops into Iraq to get at Iraqi oil? In fact, it would seem like Bush is doing everything in his power to restrict oil resources, up to and including destroying those wells which he cannot control.

    Downsouth is correct in that Bush isn’t at all interested in oil for oil’s sake, but as a lever of power. It has been so ever since oil began powering society over a hundred years ago. As Greg Palast details in Armed Madhouse, only 5% of Iraq’s oil has been explored — it had been kept in the ground and not spoken of because oil execs understood that Iraq’s supply could crash the oil price should it come online.

    Why would the US try to blockcade Iran when the world is in desperate need of oil? Even Israel buys Iranian oil (though, it’s routed through Switzerland according to FT).

    Why would the US want to choke off the world’s energy supply? This is a question with few reassuring answers. Actions with geopolitical consequences imply geopolitical goals. Qui bono? Central banks are forced to hold dollars so long as pegs are maintained, and the ever expanding M3 gets soaked up by oil. Banks can recapitalize while having a speculative orgy in the crude pits. Everyone wins, or at least everyone that counts to Bush.


  9. Peripheral Visionary

    “It planned to occupy Iraq and annex its oil.”

    The only problem with this statement is that there is no evidence to support it. If the U.S. had “planned to occupy Iraq” in order to “annex its oil”, wouldn’t there have been an effort to, well, annex its oil by now? Instead, the oil seems to be very much under the control of the Iraqi government, and there does not appear to have been any real attempt by the U.S. to seize control of it.

    What institution does this guy work for where he can go around making unsubstantiated (false) statements and still draw a fat salary? Oh . . . right.

    I find it interesting that the “it’s all about the oil” crowd has been split between two theories: that the invasion was intended to give the U.S. ownership of the oil fields, or that the invasion was intended to drive up oil prices to make the oil industry rich. Completely contradictory objectives, and as stated above, there is zero proof for the first theory, and pretty much zero proof for the second.

    If the goal was low oil prices, it is self-evident that the fastest way to do that would have been to drop sanctions against the Hussein regime and give oil companies the green light to do business with the Ba’athists. That that is not what happened should make it clear that oil was a secondary consideration in the larger picture.

  10. roger

    The problem is in distinguishing between conditions and causes. Certainly, without a doubt, oil was the general condition that prompted the invasion. Nobody was advocating, say, going into the Congo, or overthrowing the government of Burma.

    But the causes – or better, the reasoning people in the Bush administration used – have never sorted themselves out into a single coherent narrative. It is as interesting that, even today, after we have been fighting in a war longer than WWII, lively discussions about the reason for the war are still going on. It is a war with a blurred beginning, and one with a incoherent ending.

    This, to me, indicates horrendous planning, not supercleverness. I think the only real enduring plan that the Bush adminstration had, going in, was not to blow the political advantage the way Bush believes his father blew his political advantage in the Gulf War I. Otherwise, the occupation seems to be an amalgam of far right wing fantasies, combining radical free enterprise ideology with nationbuilding – in other words, incompatible goals. Add to that a systematic ignorance of Iraq’s history, culture and people, and a disinclination to learn anything about Iraq’s history, culture and people, and you have the trajectory of the war/occupation.

    Oil is not a coherent thread through this whole thing. The words and actions of the Americans in 2003 were clear: the plan was to privatize, quickly, the Iraqi oil fields, get it online quickly, and thus pay for the invasion and reward friends. And so they quickly pushed out anybody who really knew anything about the Iraqi oil system , then watched dumbfounded as the oil didn’t flow, the insurgents crashed the infrastructure, and they had too little force to control the situation.

    These are world class klutzes, brilliant at Enron style image management, clueless at how to actually do a project. As Doctor Evil might say, they were the diet coke of evil.

  11. Peripheral Visionary

    “I think the blood-for-oil crowd has a lot more evidence than what you acknowledge. Here’s an article that elaborates on some of that evidence…”

    Interesting read. I thought to myself, I wonder if this op-ed will get around to mentioning the fact that the Iraqi government has signed into power a keystone piece of legislation that explicitly ensures that the real profits from oil production will go to Iraqi regional governments and not to private companies?

    Nope, no mention. Oh well . . . maybe one of these days, when people are willing to recognize all of the facts and not just the ones that happen to agree with their pet theories, will there actually be a productive debate on the Iraq War.

  12. DownSouth

    peripheral visionary said:

    “…the Iraqi government has signed into power a keystone piece of legislation that explicitly ensures that the real profits from oil production will go to Iraqi regional governments and not to private companies?”

    Oh really?

    The newspapers I read certainly don’t report anything of the sort:


    According to CNN: “In the current system, royalties on existing fields go to the central Iraqi government, while royalties on undiscovered and undeveloped fields go to the regions where they’re located. Sunnis tend to have a greater presence in regions without oil and they tend to support royalties going to the central government. Kurds, who dwell predominantly in the oil-rich north, and Shiites, who are mostly in the oil-rich south, tend to favor distribution based on the regions.”

    All that, of course, is set to be changed if the much touted hydrocarbon law can be successfully promulgated. One of the major stumbling blocks standing in the way to the crafting of that law is the controversy over how the oil revenues will be shared between the central government and the regions. But no less important a stumbling block is deciding the role foreign oil companies will play.

    The Democrats are urging patience:

    “We urge you to persuade the [Iraqi government] to refrain from signing contracts with multinational oil companies until a hydrocarbon law is in effect in Iraq,” read the letter from Schumer and Kerry.

    “At this time, the [Iraqi government] currently does not have in place a revenue sharing law that could fairly allocate any revenue gained from Iraq’s lucrative hydrocarbon fields between the three major ethnic groups in Iraq,” read the letter. “We fear that any such agreements signed by Iraq’s Hydrocarbon Ministry without an equitable revenue sharing agreement in place would simply add more fuel to Iraq’s civil war.”

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