More On Oil And Iraq

Some more good articles have come out in the past couple of days on the prospects for the oil industry of regime change in Iraq, including this LA Times article exploring whether regime change would weaken OPEC. The experts interviewed have mixed opinions on whether Iraq would leave OPEC under a new regime, but all agree that more capital investment in the industry in Iraq would change the dynamic of OPEC. OPEC is in difficult straits at the moment, and is unlikely to be able to sustain the current high prices, as the closing comment in this article notes:

“OPEC faces problems not just from Iraq,” said Petroleum Finance Co.’s Alkadiri. “Global demand isn’t increasing that rapidly. You have a lot of non-OPEC production coming on. Within OPEC, you have countries that are well over their production quotas. You have a whole bunch of problems that point to a struggle within the organization and, ultimately, to the unsustainability of present prices.”

An article in Saturday’s New York Times examines the prospects for the oil service sector of the industry, which could see a lot of work from rehabilitating Iraq’s derelict oil fields. The article refers to a Deutsche Bank analysis by Adam Sieminski, one of the best energy analysts around, that points out the agreements between Iraq, Russia and France in the past decade:

Over the last several years, Mr. Hussein has signed memorandums of understanding with oil companies to develop fields once sanctions are lifted. With the United States and Britain most sharply at odds with Mr. Hussein, American companies and BP did not participate in the process. Mr. Hussein himself favored companies from France, Russia and China in an effort, Mr. Sieminski said, to win friends in the United Nations Security Council.

There is debate in the industry about whether those agreements will be honored once sanctions are lifted, Mr. Sieminski said. If Mr. Hussein remains, the memorandums would probably remain valid. But if he goes, there would most likely be a great deal of jockeying to develop fields that hold billions of barrels of oil, industry experts said.

This history makes the whole issue of “regime change in Iraq is about oil” very, very complicated. Have Russia and France been entering agreements with Iraq that violate the spirit of the UN sanctions? How likely is it that they would not be able to invest in Iraq? I would bet that these kind of considerations are influencing their attitudes toward regime change. Much of exploration and capital investment in the oil industry these days is done through multinational partnerships, and Russia and France would like to ensure that their oil companies can participate in such partnerships; Nick Schulz of Tech Central Station made this point in a National Review online commentary in September, and it’s very important. A negative spin on this point, though, would be that regime change in Iraq could remove Russian and French oil companies from their preferential relationships with Iraqi leadership, feeding into Russia and France not supporting regime change. I don’t think this negative spin makes sense, because having preferential treatment in an environment with decrepit capital assets, UN sanctions, and other obstacles to trade really cuts the prospects for profitability in Russia’s and France’s slice of the pie.

The truly beautiful thing about free trade and investment is that the size of the pie increases, so even if you have a small slice you end up with more than you had before. The richness and potential of Iraq’s human capital and oil assets are a growth opportunity for Iraqis and for multinational consortial of oil and oil service companies to work in collaboration with them to create value that does not currently exist. So there’s room for persuading Russian and French oil companies that a modern Iraq will benefit them, in addition to the benefit for Iraqis of modernity (to use Tom Friedman’s language, which I like in this case).