The politics of oil

Immediately after President George W.Bush's ultimatum to Iraq, oil prices dropped significantly to below $30 per barrel. Several reasons account for this reduction, the first being the removal of uncertainty over war in Iraq. Secondly, the market factored in the likelihood of a short war, which would not cause significant dislocation in the global oil market. Further, the International Energy Agency's (IEA) coordinated pooling of oil reserves to counter any fluctuations in the oil market. But a prolonged conflict in Iraq could upset the balance seriously. In that case the implications for India could be even more serious than those for the developed countries. It is pertinent to question the US' eagerness to launch war on Iraq and bring about a regime change. For the past two decades and more, Saudi Arabia has been a swing producer that has influenced OPEC's output and global oil prices. This situation has changed significantly. Saudi Arabia does not have the same spare capacity for oil production that it had, for instance, during the Gulf war of 1990-1991. Also, the US has been increasingly uneasy about Saudi Arabia, particularly since September 11. The US now knows that a large part of funding for Al Qaida emanated from sources in that country. The US decision on war with Iraq is related to the importance the US Administration attaches to a greater role for itself in the Gulf , which would give it greater ability to counter fundamentalism and its offshoot, terrorism. The oil component of this policy is an important determinant of war. Lebanon was at war for 22 years, but it got no attention, because it doesn't produce oil. Iraq's oil reserves are estimated at 115 billion barrels, second only to Saudi Arabia's reserves of 261 billion barrels. Iraqi officials also claim that the country's oil reserves will continue to grow to reach 300 billion barrels, overtaking Saudi Arabia in the future. Iraq's importance was recognized by the US 25 years ago, as highlighted in my book The Political Economy of Global Energy. Consequently the US favoured Iraq during the Iran - Iraq war. I explained that "of all the oil exporting nations in the Middle East, only Iraq has an abundance of water, cultivable land, mineral reserves (besides petroleum), and a sizeable but not too large population with relatively high levels of education". Regime change and a democratic form of government can bring about enormous prosperity to Iraq, and, hence, influence over this nation is highly desirable for the US. IEA projections show the demand for oil in the US and Canada increasing from 20.2 million barrels per day (mbpd) in 2000 to 27.3 mb/d in 2030. As against this the total production of oil in the US and Canada would drop from 10.1 mbpd in 2000 to 7.1 mbpd in 2030. In other words oil imports to the US and Canada as a whole would double from around 10 mbpd in 2000 to about 20 mbpd in 2030. With rapidly increasing dependence on oil imports, the US sees its economic interest coinciding with control over the global oil market and particularly over the suppliers in the Gulf. As for India, in the absence of policy that reduces dependence on oil, demand for oil will increase to 5.6 mbpd in 2030 from the current level of 2.1 mbpd. We would be more vulnerable to a sudden price increases in the global oil market than many other nations. India may be far more comfortable with a US dominated Gulf than a region ruled by unstable governments composed of dictators and monarchies. Even the campaign against terrorism, which we have a direct stake in, may be waged more effectively with greater US influence in the Gulf. Yet, the current war is not the best means to bring about regime change, and perhaps the European approach with the UN-led inspections was better.