x Abu Dhabi, UAEMonday 24 July 2017

Resource wars only make sense on the big screen

The 2003 Iraq invasion was widely seen as heralding an era of "resource wars", when major countries would fight it out for diminishing oil supplies. Now it is clear that both sides grossly misunderstood oil economics and politics.

The film Avatar has close comparisons with what was originally thought the US experience in Iraq would be.
The film Avatar has close comparisons with what was originally thought the US experience in Iraq would be.

A precious mineral in a remote place is vital to humanity's energy supplies. Sinister corporate interests encourage an invasion, but they misunderstand and antagonise the inhabitants of the remote place, leading to an inevitable uprising. Despite the invaders' advanced weaponry and brutal methods, they suffer increasing casualties and can do little more than hold out in fortified bases. It is the plot, of course, of the science fiction film Avatar. But to many, it also suggests the American experience in Iraq.

The 2003 Iraq invasion was widely seen as heralding an era of "resource wars", when major countries would fight it out for diminishing oil supplies. Now, with the first big Iraqi contracts finally being awarded, it is a good time to take stock. Was Iraq a fight for oil? And do resource wars make sense? A major theme of the anti-war protesters was that there should be "no war for oil"; that the US and its allies were planning to take control of Iraq's oil for their own benefit.

They charged that US multinationals such as ExxonMobil and Halliburton, the then vice president Dick Cheney's old employer, would profit from it, and possibly even that the US would siphon off Iraqi oil money for its own purposes. For the administration, Larry Lindsey, the economic adviser of the then president George W Bush, stated that, "The successful prosecution of the war would be good for the economy."

They believed that post-war reconstruction, at between US$50 billion (Dh183.65bn) and $60bn a year, could be financed by the country's own oil revenues. Now it is clear that both sides grossly misunderstood oil economics and politics. The economic rationale can be easily dismissed. At the time of the invasion, the Bush administration estimated a cost of about $100bn. Yet fought incompetently and with general disregard for human rights, the war has been vastly longer and more destructive than foreseen.

Joseph Stiglitz, the Nobel laureate and former World Bank chief economist, estimates that total costs to the US alone will eventually reach $3 trillion. Seven years after the war, Iraqi production still languishes below levels of the year 2000 and the government continues to run a budget deficit. Even if Iraq were to step up production sharply without the oil price crashing, and the US were somehow to siphon off the additional revenues, it would not even be enough to pay the interest on a $3tn war bill.

In fact, colonial days are long past and a sovereign Iraq decides how to spend its own income. American profits from Iraqi oil are limited to their very limited return from service contracts. Far from giving away oil to foreigners, Iraq has bargained well and should profit handsomely from these deals. A large contract might yield some $300 million net per year, less than 1 per cent of ExxonMobil's worldwide profits, a meagre amount for committing so much capital and so many people to such an unstable environment. It would have been easier for oil supermajors to have lobbied for a tax break rather than a major war.

Politically, it has been impossible for the invading powers to shut out foreign competitors. Yes, US and British companies have won contracts, but so have Chinese, Russians, Norwegians, Malaysians and even Angolans. Geopolitical arguments are more subtle. One concept was that a West friendly Iraq could boost production, bringing down oil prices and undermining OPEC. That would weaken states hostile to the US, notably Iran and Venezuela.

Yet the fighting actually helped the oil price to hit record levels, as export pipelines were repeatedly bombed and reconstruction became impossible. Iraq would never have acted so much against its own sovereign interests. Iraqi nationalism strongly opposes privatisation of the industry; virtually every major oil exporter has a dominant national oil company. A low oil price would have hurt major US allies such as Saudi Arabia, the UAE and Mexico. It would also have been bad news for ExxonMobil and other US oil majors: conspiracy theorists can't have it both ways.

The US even hinted that opponents of the war, such as France and Russia, would be barred from access to Iraqi oil. With today's oil markets, these kind of selective boycotts are impossible. If France could not buy from Iraq, they would buy from Kuwait or Nigeria. The creation of an ally in the heart of the Middle East may have seemed attractive, but Iraq, chaotic and dangerous, has been useless as a US base.

The destruction of Saddam Hussein removed Iran's great enemy in the West, as the removal of the Taliban did to the East. That, with high oil prices and growing regional anti-Americanism, strengthened rather than weakened Iran. So, in a post-colonial world, invasions for oil cannot pay for themselves. Modern armies are too expensive and, in a world of the iPhone and the Prius, resources are not valuable enough. Global opinion and local resistance do not permit any country simply to plunder oil.

Resource wars make good science fiction, but the hopes of those who launched the Iraq invasion, and the fears of its opponents, were equally unfeasible. Robin Mills is a Dubai-based energy economist and the author of The Myth of the Oil Crisis (Praeger, 2008). @Email:robin@oilcrisismyth.com