The Saudi Nightmares about Iraqi Oil

Saudi Arabia is the largest oil producing country among the members of the Organization of Oil Producing Countries (OPEC) and, as such, it is the dominant force in that organization. Changes in the supply equation that could diminish its role and influence in the international oil market and, more significantly, the future of the oil cartel, concern Saudi Arabia greatly. The possible entry of Iraq, in a considerable way, into the oil market is more than a matter of concern for the Saudis - it may even develop into an economic nightmare.

Iraq has proven reserves of 112 billion barrels which are 11 percent of total proven reserves in the world, and second only to Saudi Arabia's reserves which account for more than 20 percent. There have been no oil explorations in Iraq for more than a decade and the possibility remains of finding even greater reserves when explorations are renewed.

Imports of Arab oil by the United States in 2002 were 975 million barrels, representing 28 percent of total oil imports by the U.S. in that year. The biggest Middle Eastern exporters of oil were Saudi Arabia (585 million barrels) followed by Iraq (285 million barrels) — corresponding to 60 percent and 29.2 percent from Saudi Arabia and Iraq respectively. [1]

Saudi Concerns

Long before the war in Iraq, Saudi columnist Dr. Saleh Al-Namla discussed the "expected challenges" following an American invasion of Iraq — economic, political and cultural challenges. From the economic perspective, the American invasion, says Al-Namla, means "the rebuilding of modern petroleum facilities and enormous exporting power… [suggesting] that America will not only be a mover in the international oil market but a principal player [in it]. This would mean control not only of the quantity and price of oil but the ability to exercise arbitrariness by striking at petroleum [producing] countries and [causing] their bankruptcies." [2]

Writing three months before the start of the war in Iraq under the title "Oil is the First Casualty after the American Invasion of Iraq," a number of Saudi experts speculated about the effects of the war on the oil situation. The article denounced American intentions "for naked interference in the freedom of the oil market and the militarization of this strategic item in order to lower prices by divorcing them from the market's instruments of supply and demand." One interviewee, Dr. Muqbi Al-Thukair, a professor of economics at King Abd Al-Aziz University, warned that American control of the oil wells in Iraq will have a major political effect if OPEC decisions are overlooked. He added: "As it is known, the Western world is trying to destroy OPEC… because they prefer to see oil prices decline but only to a level that would not cause harm to their Western oil companies." [3]

Returning to the subject after the occupation of Iraq, the Saudi daily Okaz warned in an article subtitle that "the exit of Iraq [from OPEC] will cause mortal competition amongst all the producers." Dr. Wadi' Kabli, a professor of international economics at King Abd Al-Aziz University is concerned that if Iraq were to leave OPEC and follow the market mechanism for supply and demand it could cause OPEC to disintegrate and lead to the withdrawal of other countries from the organization, "and this will be the end of OPEC." Another interviewee quoted in the article, Dr. Abd Al-Aziz Daghastani, chief of the economic studies department in Riyadh, suggested that if Iraq would leave OPEC it would bring a new equilibrium between OPEC and non-OPEC oil producing countries. He concluded: "This will weaken OPEC, and we could bid the organization good-bye." Dr. Abd Al-Rahman Al-Sanniy', referred to in the article as an economic writer and analyst, is concerned that the U.S. would exercise its authority over a new Iraqi government to withdraw from OPEC. Such withdrawal would have three negative consequences:

• The U.S. will privatize the oil sector for the benefit of the large U.S. oil companies, followed by British and Australian companies.
• The Western oil companies will manipulate production to lower prices in the international market.
• These companies will begin putting pressure on prices to drive them down to $22-28 per barrel in the immediate term, and further down to $15-18 per barrel in the long-term. This could harass OPEC and bring to its dissolution. [4]

Writing in the London-based Saudi daily Al-Sharq Al-Awsat, Al-Sanniy' considered the American presence in Iraq as being driven entirely by the desire to exercise complete control over its oil. He attributed such a desire to rapidly deteriorating macroeconomic indicators in the U.S. since September 11, 2001, to a level not seen since the Great Depression. He listed the budget deficits, national debt, and a high rate of unemployment as factors that could lead "to the collapse of the economy of the greatest country in the world." [5]

The apocalyptic warnings about the American economy raised by Al-Sanniy' are exceeded only by Abd Al-Wahab Al-Qahtani who wrote an article in Al-Sharq Al-Awsat about "OPEC and the Challenges of Destiny." He expresses concern that "the Zionists are planning to enter the petrochemical industry in Iraq, and even in the Gulf countries, under the cover of globalization and unilateral economic complementarities. We have nothing to offer," he lamented, "but tears and denunciations about our wealth being stolen right under our nose." As evidence of such an eventuality, the author recalled former U.S. ambassador to the U.N. Jeanne Kirkpatrick, "who is known for her support for Israel," calling on Iraq to withdraw from OPEC. [6]

In an unsigned piece in the London-based Saudi daily Al-Hayat, the author sees OPEC shifting from "offense" to "defense" upon the re-entry of Iraqi oil into the market. OPEC countries were able to raise prices while Iraq was under sanctions which restricted its production. "Waves of fear from the future are rolling across OPEC," says the anonymous author, which led Iran to warn against a struggle over shares (under OPEC's quota system) which could deliver a blow to prices. "Price wars are inevitable," said the chairman of the Energy Committee in the Iranian parliament, "if Iraq produced more than the share allocated to it." [7]

Iraq's Present Production Capabilities

Many of these discussions took place long before Iraq exported a single barrel of oil. But they have taken place because of a belief that Iraqi technicians, despite years of poor maintenance because of sanctions, looting, the breakdown of the communications system inside the country, and the interruptions in electric supplies, will be able to invigorate the oil industry faster than was expected. Iraq has announced that it would start exporting oil at the rate of 750,000 barrels per day (b/d) by the second half of June. [8] The American appointed head of the Petroleum Ministry was talking about 1.4 million b/d by the end of June. This may look optimistic but it is certainly achievable by the end of the calendar year. [9] Fadhel Al-Chalabi, director of Global Energy Center in London, who called for the privatization of the oil sector in Iraq, talks about exports of 8 million b/d in 6-8 years and perhaps even 10 million b/d if new discoveries are made. [10]

Conclusion

Saudi Arabia's weight as a Middle Eastern power is measured by its oil reserves and its overwhelming influence in OPEC. If OPEC's role is to diminish as a result of independent Iraqi oil policies, or perhaps even to disintegrate, the consequences for Saudi Arabia's political influence are enormous. Beyond the economics of pricing, oil contributes 85 percent of Saudi government revenues. As an exporter of approximately 7.5 million b/d, a decline of $1 dollar per barrel would translate into a loss of $2.7 billion annually. A decline of $10 per barrel translates into a nightmare for the regime struggling to meet the needs of a rising population and correspondingly rising unemployment.

* Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.