Iraq Should Be In No Hurry to Reach 6 Million Barrels per Day Output

An International Energy Agency study, released on October 9th, 2012, estimates that Iraqi oil production may reach 6 million barrels per day (mbd) by 2020 from its current output of 3mbd. This estimate is largely based on the statements of Iraqi politicians, who see oil revenues as the principal means of solving Iraq’s deep economic and social issues.

On the surface, this approach would seem like common sense, but does it hold up to closer scrutiny? Hanging Iraq’s future prospects on a 6mbd output holds considerable dangers. In the first place, as is often said, geography is not on Iraq’s side. There is limited scope for expanding port capacity into the Persian Gulf, and Iraq’s pipelines are old and leaky. Doubling oil exports will mean building new pipelines, which must pass through neighbouring states – not all of which will look on expanding Iraqi oil production with favour. It may be that these states will impose rents and conditions that will become prohibitive. In short, taking the oil out of the ground is one thing, getting it to foreign markets is quite another.

But could this obstacle nature has put in Iraq’s way be a blessing in disguise? Over the last 40 years, many oil producers have taken the attitude that we better sell as much of our oil as possible, before Western technology comes up with an alternative that will make oil redundant. This attitude is based more on a superstitious reverence for Western technology than any real appraisal of the facts. The cold fact is that there is absolutely nothing on the technological horizon that could come anywhere close to replacing conventional oil. There has been much excitement about shale oils and gases, wind and solar power. However, if one applies an Energy Return on Investment (EROI) analysis to unconventional oils or to “renewables,” we see that none of them return more energy to society than the energy they take to extract. All of them depend on massive subsidies from the conventional oil economy. For example, for “renewables” to make any economic sense, one must take for granted that roads, transport machinery, petrochemical fertilizers and plastics already exist, along with their maintenance. In short, one must depend on a world already created and maintained by conventional oil. No conventional oil, no renewables.

There are very good grounds for believing that, globally, we reached Peak Oil in or around 2005. It’s not that we have run out of oil, but the cost of increasing the flow of oil has become prohibitive. New oil finds are deeper, more expensive to drill, and in smaller quantities. Industrial civilization depends on economic growth – just to stand still. That growth depends on growth in oil output. Since this civilization is an oil-based civilization, Peak Oil means economic decline and collapse.

We have entered an era where basic survival has become a very real issue for industrial nations. In the starkest terms, those states that have secured their oil supply will survive, those who have not will collapse, and their people will suffer greatly. This is a fact that must be meditated on – particularly by those states, including Iraq, that are fortunate enough to have their own oil supply.

But, Peak Oil and geography are not the only topics that Iraq should meditate on in relation to an increase in oil output. The history of oil states, over the last 40 years, offers many valuable lessons. The Kingdom of Saudi Arabia (KSA) is, of course, the king of the oil producers. In several respects, it is a comparable country to Iraq. Its population is about 27 million, while Iraq’s is about 31 million. Like Iraq, it has a very high proportion of young people, and this young population is expressing a deep alienation from the structures of a society that they feel does not respond to their needs. Unemployment in KSA is officially put at 12.5% (though the actual figure is likely to be considerably higher) and poverty and lack of basic housing, despite the vast oil wealth, remain at very high levels. About 90% of state income still comes from oil and petrochemical exports. 90% of employed Saudi nationals work for the state, and 90% of jobs in the private sector are filled by about 8 million foreign workers.

All of the above is entirely typical for oil states. Oil has traditionally been used to defer social problems rather than solve them, and, if we look closer at the case of KSA, we see that the deferment has only added to problem. In the KSA, the private sector is little more than a method of putting state cash in the pockets of certain preferred individuals, via state contracts. And it’s not as if this cash was then passed on to the rest of the Saudi population, in wages etc. As we see above, the Saudi private sector prefers low paid foreign workers to Saudi nationals. Add that to the fact that taxes are almost zero in the KSA, and we understand that very little of the money going from the state to the private sector does the Saudi nation any good. This has become such a chronic problem that the government has introduced fines and other measures to try to force the private sector to start giving jobs to Saudi nationals. So far, without any real success – despite the fact that most of the private sector is involved in carrying out contracts for the state, mostly in construction and transport – contracts the state could carry out itself, with a Saudi workforce. After all, the KSA has had 40 years of wealth to train up a workforce.

These facts are to be kept in mind when Iraqis are “encouraged” by Western institutions like the World Bank and USAID to base their economy on the private sector. The history of oil states shows that the private sector in such states is never more than a supplement to the state. Far from being more productive than the state, it often acts purely as a means for a few well-connected individuals to grossly enrich themselves. And very far from being an answer to unemployment, it generally acts to exclude native workforces from job opportunities by importing low-wage workers from abroad.

The KSA has been exporting oil, in great quantities, since 1970. In the 40 years since, it has not managed to diversify from an oil economy. The sad fact is that if the oil ran out today, the KSA would immediately collapse into desperate poverty. Yes, the KSA has colossal assets in foreign banks. But, much of this wealth is in private bank accounts. There is no reason to be confident that it will ever return to the KSA to do the people any good. This is a history that Iraq must avoid.

Another rather controversial issue is the vast sums the KSA spends on its military, which is generally regarded to be ineffective. It’s difficult not to come to the conclusion that the only people benefiting from this expenditure are U.S. arms manufacturers. It may be that finding real solutions to real social problems would be a far more cost-effective solution than buying F16s. No doubt, this is a point that is not lost on Iraqi policy makers and citizens.

However, the lessons from the KSA are not all negative. The state has built up very valuable petrochemical industries, which now account for 8.6% of Saudi exports. This is the kind of value added activity that Iraq needs to develop, i.e. bringing the oil to as near a final use state as possible before exporting it. 86% of those Saudi nationals who are employed in the private sector are involved in tourism, or more particularly in providing services to the millions of pilgrims who visit the KSA every year. This is also an area where Iraq has been developing, with some success. The KSA has also built up considerable knowledge and technology in water treatment and management. This is knowledge that is now exportable. Advanced agricultural methods have also been developed. These are all areas of the most vital interest to Iraq.

In conclusion, Iraq has a unique opportunity to learn from its neighbours, and to take full account of the new reality of Peak Oil. In that new world, possessing oil is the basis for survival. Iraq has well learned, from the hard experience of the last ten years, that throwing money at problems is no solution. A smaller oil income, well spent, is far more valuable than a large income wasted – a large income that is of very finite duration.

8 thoughts on “Iraq Should Be In No Hurry to Reach 6 Million Barrels per Day Output

  1. This is true to some extent, but they have been smart in some areas. For example, oil companies drilling in Iraq must sell the oil directly to the state. The state pays a fixed sum of $1.30 a barrel to the oil companies on top of the approx. $5 a barrel it costs to extract, and then sells the oil on the international markets at $110 a barrel. To be honest, Iraq couldn’t drill the oil cheaper than that itself, and the oil companies have put the capital up for the drilling. China is buying more than half the oil, and doing nearly half of the extraction. This connection with China has been hugely beneficial to Iraq. If Max wants, I can do a little summery of Chinese involvement in Iraq’s development.

    Quite apart from that, although you are right that the current state is a product of the US occupation, being realistic we have no choice but to support it against the current Al Qaeda insurrection, which threatens to destroy both Iraq and Syria – and all with Anglo-Zionist support.

  2. Actually, I was incorrect to say “sell the oil to the state.” The Iraqi state owns the oil at all times, until it sells it on the international market. The $1.30 the oil companies get is a fee rather than a price. The oil companies have no ownership over the oil or the oil fields. Fortunately, such resource nationalism is now deeply seated in the Arab consciousness – primarily due to the influence of Colonel Muammar al-Gaddafi.

  3. Hi Donn, you have described KSA as a (counter)example. I wonder what’s your opinion about another 3 oil based economies, namely Iran, Gaddafi-era Libya (unfortunately this got totally ruined) and (surprise!) Norway. As far as I know, Iran (perhaps out of sheer necessity) developed its industries and now we can regard it as a developed industrial country. Libya under Gaddafi was on the same way, of course because of the much smaller population and the more punitive sanctions it still had a long way to go. Norway was quite a poor country even fairly recently, but thanks to oil it could got out of poverty. I don’t know whether in can stay rich after the oil is gone.

  4. Yes, in the 1970s and early 1980s, Al Gaddafi pushed the idea of a rapid industrialization of Libya, and considerable progress was made, but he was always up against certain factors. As you mention, there was the small population. At that time he tried to overcome this problem by by Arab political unity, particularly the unity of Libya and Egypt, which would have resulted in a state with massive population, including a massive industrial proletariat, a well developed industrial base – and massive oil and water reserves. Tragically this never came to pass. A unified Africa would also have combined massive population with massive natural resources. However, I still think Al Gaddafi would have come up against serious problems. The USSR and China became industrial superpowers in a very short space of time, primarily because of the iron discipline that the Communist Party could enforce on the population. Very few Third World countries have made progress without the structuring force of the Communist Party. You could mention South Korea, but it was ruled by a de facto National Socialist Party for decades, and then became a colony of US capital. I think one has to accept that the system of Direct Democracy advocated by Al Gaddafi doesn’t particularly lend itself to the process of rapid industrialization. This is a very brutal process. It was in Western Europe and the USA, and it was in the Communist countries. If you give people Direct Democracy, they are unlikely to vote for it.

    North Sea oil changed a lot for both Norway and Britain. Under Margret Thatcher, th eoil revenues were used to fund a massive process of privatization, from industry to council houses. Norway took a different route. State companies were developed and the system of social welfare greatly improved. But, Norway was already a European bourgeois country, with a very stable national bourgeoisie. Oil, by itself, was never going to change that. You might say that oil just made it easier for Norway to go in the Social Democratic direction it had been going in since the late 19th century. Thatcher, on the other hand, used oil to turn back everything that had been achieved by the Social Democratic movement, particularly since WW2. Today, if you ask what North Sea oil gave to Britain, all you could answer is: a colossal credit bubble, which has now burst. Norway still has its state companies and well developed social welfare system.

    As for Iran, like Egypt, and to a lesser extent Iraq, it has had an industrial base since the early 20th century, and thus an industrial proletariat. So much so that a Socialist government was elected in 1951 (overthrown by the CIA and MI6 in 1953). Of course, Iran has a massive population, of over 77 million today. One couldn’t simply put all these people out on pension, as some Gulf states do with their populations. Industrial development is vital to the very survival of the nation, and the Islamic authorities have operated a de facto State Capitalist system, ironically serving as the structuring function that the Communist Party has served in other countries.

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