In Iraq War, to the Victor Goes the Oil

Saddam Hussein is sitting on a gold mine — the second-largest oil reserve in the world — and everyone wants a piece of it.

Oil is a consideration for nations considering joining in the fight if the United States goes to war in the Persian Gulf, because the day after Saddam is removed, the Iraqi oil industry is up for grabs.

Of all of the reasons offered for removing Saddam, from terrorism to terrible weapons, oil is seldom mentioned. Yet critical to the American agenda is the fear an Iraq armed with nuclear weapons could dominated, or hold hostage a region through which flows an estimated 30 percent of the world's oil and natural gas.

Similar worries about the world's oil supply figured heavily in the 1991 Gulf War, and before that, concerns Iran might capture critical oil fields led the United States to support Iraq in the war between those two countries.

And now, oil is a consideration in the continuing drama at the United Nations. France and Russia, both with veto power in the Security Council, have extensive oil interests in Iraq.

Paying a ‘Fear Premium’

In the oil economy, talk of war is already driving prices up. A barrel of crude costs about $30, up 25 percent since August. And some analysts say the market is anticipating a crisis.

"The price is telling us right now that people think on balance that a military solution is more likely than a diplomatic solution," says oil analyst Sara Emerson.

"We see already in the oil price a sort of fear premium," adds Daniel Yergin, author of The Prize, a history of the oil industry. "Things can come together to really frighten a market."

The same happened 12 years ago, after Saddam's surprise invasion of neighboring Kuwait. When the shooting started, the oil exports stopped from the Gulf's two big producers, Iraq and Kuwait. In the three months after the invasion, oil prices went up significantly.

It was not until the air war began in January of 1991, and images of its destruction flashed around the world, that oil markets immediately calmed and prices fell by $7 to $8 a barrel.

"I think we definitely learned something last time," says Emerson. "We learned that the market gets spooked by uncertainty, and when you have a certain resolution, whether it's diplomatic or military, there is a little bit of relaxation of the uncertainty and that allows the market to come down."

Sitting on a Sea of Oil

But the lesson, experts say, is that critical to market stability is the availability of other sources of oil.

"The whole market would have its eyes and ears on what's happening to alternative supply," says Yergin. "And as long as the alternative supply was not interrupted in any serious way, probably at that point the price would start coming down again."

On that score, the oil market of today is very different from that of a decade ago. The United States and other industrialized countries have more stockpiles of oil. The Gulf states are keeping oil supplies in reserve offshore, and new producers have come online in Africa, in Central Asia, and in Russia.

But none of them can compare with Iraq. The country sits on a sea of oil — with known reserves of more than 112 billion barrels.

"The fundamental issue is, the day after Saddam is removed, the Iraqi oil industry is open for grabs, and it will depend upon the government of Iraq to decide how it will dispense that resource," says oil consultant Rob Sobhani, a professor at Georgetown University in Washington. "Certainly, American companies would be in a very, very strong position to compete for the right."

Oil is such a huge prize, it could become a consideration as countries decide whether to join the fight. All five permanent members of the U.N. Security Council — Russian, China, France, Britain and the United States — have oil companies with a stake in who rules Iraq.

"Once the fighting starts, you have to be involved or you are irrelevant," says Emerson. "And it's not just because of the Iraqi oil. It's because of the oil in the entire region. You want to be part of the postwar world in the Persian Gulf."

Don't Be in the Wrong Business

Demonstrating the concern was a surprise visit this summer to the Washington office of the Iraqi National Congress — a U.S.-backed opposition group — by a Russian diplomat interested in Iraqi oil. It was the first such high-level contact in years.

"He basically told me that 'Russia is an old friend to Iraq and we have culture, and industrial bonds and we think we should talk,'" recalls Entifad Qanbar, who heads the opposition group's office.

"I think money was on his mind," says Qanbar. "Oil is money. Money, I mean, because Iraq has an abundance of oil … It represents a way of making money."

Who will make that money? Over the last decade, companies from more than a dozen nations have been in Baghdad signing deals to develop Saddam's oil reserves. Among them are TotalFinaElf, a French company developing the oil field near the Iranian border, and Lukoil, a Russian company developing another oil field in the Iraqi desert.

Both deals are dependent on the end of U.N. sanctions against the Saddam regime. But will the same contracts be honored after a war if Saddam is gone? Not if the Iraqi National Congress has anything to say about it.

"I wouldn't worry if I was doing right business," warns Qanbar. "But if I'm doing wrong business, I should worry."

With war plans on the president's desk and a war resolution before the United Nations, the future of Iraqi oil is one factor that may be on the table with allies in Paris and Moscow.

"If we play our cards right, I think we can get them to see that it is not wise for them to continue to back a loser," says James Woolsey, a former CIA director. "And I think Saddam is going to lose."

Billions in Investment Needed

Oil analysts say things aren't so simple.

"This notion that somehow this is going to become an American oil lake and other countries are going to be excluded, I don't think that's the way the world will work," says Yergin. "If you come in by yourself, you're going to have to write the big check by yourself. You want other people to share the risk with you."

That's because it will take years before Iraq's oil industry can pump more than it is today — 1.7 million barrels a day, now 3 percent of world production. Pipelines are rusty and oil fields are in disrepair. After 20 years of neglect, it will take billions in investments to reap the returns on Iraq's reserves.

"People are not going to just whip out their checkbooks and start writing checks with nine zeros," says Yergin. "What a company needs to know is, is there going to be some political stability? How vulnerable are they going to be? They're also going to want to know, are their terms going to be stable? Are the rules of the game going to change?"

And there are other sensitive questions about the outcome of a U.S.-led invasion in the heart of the Middle East.

"The governments are the way they are, in part, because we haven't pushed democracy, and one of the reasons we haven't pushed democracy is we've just been willing to go along with whoever would sell the cheapest oil, however bad the government was," says Woolsey.

Even without Saddam, instant democracy is not likely. For one thing, Saddam's iron rule has kept Iraq united — the real fear is that Iraq will splinter into rival groups once he is gone.

In contrast, the hope: A democratic Iraq would be an oil-rich ally with a government friendly to Washington.