The Iraqi Oil Crisis

ISN is reporting an Iraqi oil industry in crisis.

Iraqi oil exports fell to their lowest level in two years in November 2005. Bad management of the reconstruction effort, widespread corruption among government figures, and sabotage by insurgents are the reasons for the decline. Experts say that the US strategy of military intervention in oil-rich regions can only diminish, rather than increase, the supply to world markets.

Two-and-a-half years after the US invasion of Iraq, the country's oil industry is still in disarray. An official of the Oil Ministry in Baghdad told ISN Security Watch, on condition of anonymity: "We do not know the exact quantity of oil we are exporting, we do not exactly know the prices we are selling it for, and we do not know where the oil revenue is going to."

One of the reasons for the decline of the industry is a lack of progress in the reconstruction effort, due to serious managerial deficiencies.

For instance Halliburton subsidiary Kellogg Brown & Root (KBR) was awarded a US$225 million contract, without a tender, to rehabilitate the Qarmat Ali Water Plant in southern Iraq, according to a report in the Los Angeles Times.
The plant is used to pump water into the ground in order to build pressure that brings the oil to the surface.

However, the contract did not include the repair of the pipelines carrying the water to the oilfields. When the water was pumped into the ground, the old pipes burst, spilling large amounts of water into the desert. In addition, farmers often tap the water pipes in order to irrigate their fields.

A failing strategy

Oil terrorism and corruption, if allowed to continue, will seriously harm Iraq's future. The country's economy, damaged by two Gulf wars, the 2003 invasion and 13 years of UN sanctions, urgently needs a period of peaceful reconstruction and the exploration of new oilfields. Only 15 of over 70 known fields have been developed properly. It usually takes at least five years to bring a new field into operation.

Michael T. Klare, a Professor of Peace and World Security at Hampshire College and author of the book 'Blood and Oil', wrote that it is "an article of faith among America's senior policymakers – Democrats and Republicans alike – that military force is an effective tool for ensuring control over foreign sources of oil."

However, Klare concludes that "the growing Iraqi quagmire has demonstrated that the application of military force can have the very opposite effect; it can diminish – rather than enhance – America's access to foreign oil."

One of the myths of this war was that oil revenue would quickly pay for reconstruction of Iraq. Instead it has reduced the flow of oil, uncovered zero WOMDs, and led to a civil war between various Iraqi factions. The US is of course caught in the middle.

Let's consider the bright side.
Some might consider this a win-win-win situation.

• Mobil is making record profits
• The S&P energy sectors have been on fire most of the year
• Halliburton execs get to pad their pockets with "free" taxpayer money

Now if you are in a group that benefited from those developments, our strategy in Iraq might be considered a complete success. On the other hand, if you are in the much larger group more concerned about prices of gas at the pump as opposed to the government stuffing your wallet with lucrative contracts to water the desert, perhaps you see things differently.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/