November 3, 2002

11:39 PM

Carve-up of oil riches begins US plans to ditch industry rivals and force end of Opec, write Peter Beaumont and Faisal Islam
posted by Postroad (14 comments total)

Well I know I will be crucified, but I will take a stab at this one:

First as for the article, it throws this out front:

Ahmed Chalabi, has met executives of three US oil multinationals to negotiate the carve-up of Iraq's massive oil reserves post-Saddam.

And then the Guardian does not not back it up. I am sure that a INC spokesman confirmed that indeed, there were meetings, but I sure that the spokesman did not tell the newspaper that it was about "carving-up" oil reserves. Their only proof, as side from a BP executive complaining of not being included in the talks, is that a right-wing think tank created a report that concludes that the oil reserves should be divided. Well anyone can find a think tank that has positions on Iraq, that does not necessarily make them the policy of the current administration.

I have no doubts that U.S. oil companies are interested in Iraq's oil, but I belive for a different set of reasons. May I point out to everyone that the stock prices of oil companies are tanking? Take a look at five oil companies for example: Chevron/Texaco, Exxon Mobil, Shell, Marathon, and Conoco/Phillips. In the last 12 months, all of their stock prices have dropped significantly. Looking at the chart, you can see that as the talk of war increased in late summer, the prices correspondingly dropped.

Why, you may ask? I thought we were going to war for oil, right? Well to understand why investors are dumping oil stocks, we can look to the simple economic principle of "Supply & Demand." When Demand is high and Supply is low, the price of the product is high. Because of a lot of reasons, inefficiency and it's hostile stance at the world being two of them, Iraq is producing beneath it's own capacity for oil. This keeps the price of oil high. In fact this is the whole point of OPEC, to regulate the amount of oil being produced in order to maintain a "reasonable" price of oil for producing nations in the middle east. If foreign countries (American or otherwise) would have their oil companies take over the Iraqi oil fields, efficiency would, no doubt, increase. As well, the foreign companies would render OPEC useless, as the organization works contingent of all middle eastern oil producers co-operating. The production of more oil in to the market would cause us to revisit our economic principle of "Supply & Demand." Now that supply has gone up, and demand has not followed, price will go down. (Yes, some oil consumption will grow, but not nearly enough to match oil production)

Good for consumers, bad for oil companies.

Some of you may say "Well, the oil companies will just sit on the Iraq oil, and not let it get to market." Well then this, as well, defeats the whole argument that we are going to war over oil, if the oil companies have no intention of using it, then why take all the risks to "liberate" the oil fields?

Then this begs the question: Why would the energy industry lobby GW to take out Iraq? If they (U.S. oil companies) refine the Iraqi oil, the market gets flooded, and price goes down. If they don't use the oil, why lobby to get the oil?

There are reasons to go to Iraq, but oil is not one of them.
posted by Steve_at_Linnwood at 12:57 AM on November 4, 2002

Steve, I have to disagree. Your "supply and demand" logic is partly right - prices will go down. That is, the prices of those who drill the oil. The "wholesale" price, for want of a better word.

So currently, the situation might look something like this:
Saudi Arabian Oil (Aramco?) sells to Exxon-Mobil at $1.50 / gallon. E-M sells this for $2.50 / gallon to consumers (the numbers are screwy, but bear with me). Profit to E-M - $1 / gallon.

Try this post-conquest scenario:
Iraqi Oil Co sells to E-M at $0.50 / gallon (fewer taxes, no price fixing, OPEC quotas). E-M sells it for $2.00 / gallon. Profit to E-M - $1.50

So post-conquest, bigger profits for USian oil companies, cheaper for consumers. No growth in consumption necessary. Very little profit goes to Iraq etc, which doesn't worry said oil companies one little bit.

If you want to ignore the casualties, oil's one hell of a reason to go to Iraq. I don't think Big Oil really cares about casualties.
posted by lambchops at 2:32 AM on November 4, 2002

You are discounting in your "cutting out the middle-man" the gigantic cost of developing the infrastructure of the oil fields, as Saddam is sure to destroy everything, and set them ablaze, before he goes out.... and that is besides the point that there will still be more oil on the market, no matter if Exxon-Mobil has a direct tap...

I still see the dumping of the stock price as notable. If the case was that the Oil Co. were going to be raking in the money, their price would skyrocket on news of war with Iraq, instead of decline like they have.
posted by Steve_at_Linnwood at 2:41 AM on November 4, 2002

Good point about the cost of rebuilding. Could an alternative explanation for the dropping of oil co shares be the continued stalling of various UNSC resolutions and so on?

The article sure does give a good reason why Russia, France and China might not want to see Saddam replaced with a US puppet - all those pending oil deals! I wonder if setting up these deals was a deliberate move by Saddam to curry favour?
posted by lambchops at 3:02 AM on November 4, 2002

Could an alternative explanation for the dropping of oil co shares be the continued stalling of various UNSC resolutions and so on?

That is a very plausible theory, and a good point.

As for the article's dealings with Russia, France, and China, I oddly find my self in agreement with the Guardian. Lambchops, I think you are absolutely correct, Saddam is ruthless, not stupid.

I think Russia and China will go along, as long as they know that they will get a "piece of the pie" so to speak, they just want the money and oil.

France in itself has a larger issue than that of money and oil. France is in the middle of a self image crisis, it still sees it self as a predominate world power, that it once was. I belive that this is more about France showing that it can play with the 'big boys' than oil or weather Saddam is a threat to western civilization. I have just read a couple of articles about how now that the socialists are out of power in the French government, the French are planing to boost military spending by some $80 billion... Something very odd for Europe.

These dealings at the UN are more a power-play to counter America, than anything else.
posted by Steve_at_Linnwood at 3:18 AM on November 4, 2002

What idiot would argue that the meltdown of OPEC would not be a good thing? Show me one OPEC member which is not a disgustingly undemocratic, corrupt regime.

Look. The world should kick the oil habit asap. But high prices, whatever the cause, is not going to do it. Clever science and environmental concerns will do it. In any case, I'd rather oppose the Bush administration and its successors sans OPEC than with it farting in the background.
posted by ParisParamus at 4:49 AM on November 4, 2002

Some points from a semi-industry person:

The infrastructure needed to drill and ship oil is minimal, especially in the Persian Gulf. Indeed, that's the reason the production costs are so low. Refineries are expensive, but there are lots of those in the continental US with extra capacity. Refining is a value-add; everybody wants to do it. Kuwait was operational very quickly after the fires were out.

Secondly, OPEC has the rest of the world by the short-and-curlies because of production cost. Drilling for oil in Arabia essentially consists of scraping the sand and shoving a pipe in the hole. The Arabian Gulf countries have the lowest production cost in the world, about $1-2/barrel. OPEC can wait any price dip out. The Russians have the next lowest significant production cost after OPEC at about $8-10/barrel. Indeed, with oil at $20/barrel, Russia is OPEC's current bête noir.

Aside from the corporate politicking over the future corpse of the Iraq Petroleum Corp., Russia's interest here is a $10G loan repayment and partial control over the second largest oil reserve on the planet. There's a real possibility that the US might fight the war, but have Russia win it.
posted by bonehead at 5:44 AM on November 4, 2002

as Saddam is sure to destroy everything, and set them ablaze, before he goes out....

Before he does that, following your logic he'll also blow up those WMD and try to erase Israel from the face of the earth.
Isn't this a good reason to be less trigger-happy? (i.e. maybe Saddam is not as irrational as you guys like to argue, and his arsenal -- whatever that may be -- won't be used against Israel and the West unless he gets attacked?)

The world should kick the oil habit asap
Very true. (among many nice things to happen then, Al Qaeda should have to find other sources of revenue -- probably cookie sales, Osama t-shirts, Mohammed Atta memorabilia).
But are you willing to pay _personally_ the price? -- the radical change in your daily routine, in your energy consumption etc (the US nowadays burns 25 % of the world's total oil consumption)
posted by matteo at 6:37 AM on November 4, 2002

Steve_at_Linnwood:

That's an excellent bit of hand-waving, but it doesn't really mean anything. Right now the US oil companies don't control the Persian gulf oil. If they get a significant chunk (or all) of the oil in Iraq they will. And if they control it, they can set whatever price they want.

Today in Saudi Arabia, gasoline costs 10 cents a gallon. That’s how much it costs without price controls and taxes. I don't think it will ever cost that much here, but obviously there is a huge amount of cost involved between when the oil leaves the desert and when it gets pumped into our cars.
posted by delmoi at 6:51 AM on November 4, 2002

ParisParamus: Show me one OPEC member which is not a disgustingly undemocratic, corrupt regime.

How 'bout Venezuela? Algeria, Indonesia and Qatar have a way to go, but they haven't quite plumbed the undemocratic depths of Iraq.
posted by lambchops at 7:18 AM on November 4, 2002

Not that I really want to back up our own Strident Submarine. For the record, here are the 2000-01 Freedom House scores for the eleven members of OPEC. The first number represents political liberties, the second economic liberties, and the last is the code for "free", "partly free", or "not free". 1,1,F is the maximum.


Indonesia.....3,4,PF
Venezuela.....3,5,PF
Nigeria.......4,4,PF
Kuwait........4,5,PF
Algeria.......6,5,NF
UAE...........6,5,NF
Qatar.........6,6,NF
Iran..........6,6,NF
Saudi Arabia..7,7,NF
Libya.........7,7,NF
Iraq..........7,7,NF


It's not exactly the Club for Democracy, by any measure. Still, it's important to note that OPEC doesn't have anywhere near the power of the pump that it did during the embargo a generation ago; in fact, they pretty much seized the moment where OPEC members oil exports (considered as a percentage of Western imports) peaked. The US, the North Sea, Russia, and now the Caucasus and Central Asia are all significant sources of oil who do not belong to the cartel. Russia is a particular problem for them. Russia's loans would likely be honored by a successor regime, but the oil-development contracts are another matter entirely.

Saudi Arabia, especially, would lose its predominant position in OPEC if Iraq were to change its status; they have much to lose if they are no longer -- so to speak -- the US's front line against a menacing rogue state, a role they have relished using as leverage.

It's clear enough -- and you don't need to be one of the Guardian's hated hawks to see it -- that any oil cartel, but especially one with even the attenuated power of OPEC, is problematic for the interests of anyone who depends on that oil, the US included. Ours isn't the only economy built on cheap petroleum. As such, the US would clearly be interested in keeping new countries from joining OPEC [note that not even all Arab countries are members (though the ones with the largest oil exports are)], though in practice they've simply used what pressure they could on member countries to avoid the worst production limits or other negative consequences. But mainly the trend toward new sources of oil has also undercut OPEC's power.

Finally, note that oil is fungible. In many ways it doesn't matter who actually pumps it, if you're concerned with the global cost per barrel and overall availability. The American goal has never been outright control of oil supplies, but free access to and from oil markets. Even if Russian companies "get" the oil, the US still wins with lower costs and more secure supplies.
posted by dhartung at 9:21 AM on November 4, 2002

delmoi: It make a lot more when you actully read what is wrote. The market sets the price of oil, not the companies. If no one is willing to buy at the price they want, they lower it until some one does buy it. Basic economic principle.
posted by Steve_at_Linnwood at 9:26 AM on November 4, 2002

Paris_Paramus: (price/oil consumption relationship) - It was during the oil "crisis" (artificial) of the early 1970's - with it's high gas prices - that US citizens started buying little, efficient cars. The MPG rating of the US passenger vehicle fleet maxed out, I think, around the mid 80's (and has declined ever since). The recent record shows that high prices are an effective way of reducing oil consumption.

Steve_at_Linnwood - when discounting oil as a motivation for invading Iraq, I think you may be confusing the interests of US oil companies with the long term geopolitical interests of the US - as defined by the Bush Adm. Even though many of these guys were in ther oil 'biz until recently, I credit them with some ability - as federal gov. employees - to put aside their private sector loyalties and look after the long term interests (as they see them) of the US.

As "Rebuilding America's Defenses" spells out, control of oil is critical. This has nothing to do with the short term manipulation of oil prices, but is about - quite simply - guaranteeing access to the 2nd largest (proven) reserves in the world. Between Saudi Arabia (believed to be unstable) and Iraq, the bulk of the world's proven reserves are owned by sketchy governments. If I were a Cheney,Rumsfeld or Wolfowitz, I'd be worried...

my solution would be rather different though...
posted by troutfishing at 9:57 AM on November 4, 2002

Maybe I'm being dense, but this is their oil. What makes America think it has any right to it?
posted by salmacis at 4:39 PM on November 4, 2002