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.