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I. Colonization: A Question of Moral Obligation
II. A Description of a Recurrent Experience: Iraq 1910-1914 and again in
III. Oil: a Key Military Asset.
IV. Ideology Enforcing Strategic Reasons
V. Evolving Paradigm
VI. Regional and Geostrategic Implications: China is a Factor
VII. Saudi Oil Capacity: Any Limit in Sight?
VIII. OPEC’s Continued Stabilizing Role
IX. The Emergence of a New Oil Industry Structure

Editor: Stuart Wilkinson
Director_ Mazhar Al-Shereidah

The US has been acutely aware of the need to diversify its sources of supply over the past decade, and has promoted the development of reserves in West Africa, Brazil, the deep-water Gulf of Mexico, the Caspian, and Russia’s Sakhalin Island. Despite some success, the 30 billion barrels of reserves discovered in these regions is less than 3 per cent of the world total.

Global energy demand will increase by two-thirds to 300 million barrels a day of oil equivalent by 2030 (1), says the International Energy Agency (IEA) [of the US Department of Energy (DOE)] which estimates that as much as 90 per cent of the incremental demand will be met by hydrocarbons, and that their share of world energy consumption will grow. Oil currently accounts for 38 per cent of global energy demand, but fossil fuels, including coal and natural gas, account for 88 per cent.

Oil is set to maintain its leading role in the world’s energy balance in the next three decades. But an increasing share of oil and gas will come from the Middle East, which sits on two-thirds of proven global oil reserves and a third of natural gas. By 2030, OPEC’s share of global oil supply will balloon to more than half, compared with 30 per cent today. What is more, almost 60 per cent of oil supplies are likely to be internationally traded by 2030, against 45 per cent in 2000. This will render consumer countries increasingly vulnerable to supply disruptions. “The world will become increasingly dependent on inter-regional trade,” says IEA former executive director Robert Priddle. “This could be an integrating force, or it could be a source of new tensions.”
Many consumer nations face an increasing reliance on Middle East oil. The UK will become a net importer of petroleum in the next few years. OPEC member Indonesia is set to follow by 2020. And China could import as much as 10 million barrels a day, close to current US levels, by 2030.

As of April 2003, following the Iraq war, excess world oil production capacity stood at only 700,000 to 1.2 million b/d, all of which was located in the Gulf, according to the EIA (2). In an updated Persian Gulf Oil and Gas Exports Fact Sheet, posted to the DOE website on 18th April ( ), the EIA notes the world’s total reliance on spare oil production capacity in the Gulf, which normally stands at around 90% of the world’s spare capacity, given the recent supply disruptions in Venezuela, Iraq and Nigeria. The report estimates that the oil production capacity of Gulf countries amounted to 22.3 mn b/d at the end of 2002, or 32% of the world’s total. Proven oil reserves in the Gulf region are estimated at 674 billion barrels, which is about two-thirds of conventional global oil reserves. Gulf gas reserves are estimated at 1.923 trillion cubic feet, equivalent to 35% of the world-wide total. “In 2002,” says the report, “Gulf countries had estimated net oil exports of 15.5 mn b/d. Saudi Arabia exported the most oil of any Gulf country in 2002, with an estimated 7.0 mn b/d (45% of the total). Also in 2002, Iran had estimated net exports of around 2.3 mn b/d (15%), followed by the United Arab Emirates (2.1 mn b/d - 13%), Kuwait (1.7 mn b/d - 11%), Iraq (1.6mn b/d - 10%), Qatar (800,000 b/d - 5%), and Bahrain (10,000 b/d - 0.1%).

Gulf oil production is expected to reach about 30.7 mn b/d by 2010 and 42.9 mn b/d by 2020, compared with about 21.7 mn b/d in 2000. This would increase Gulf oil production capacity to 35% of the world total by 2020, up from 28% in 2000.”

US gross oil imports from the Gulf fell during 2002 to 2.3 mn b/d (almost all of which was crude), says the report, from 2.8 mn b/d in 2001. “The vast majority of Gulf oil imported by the US came from Saudi Arabia (69%), with significant amounts also coming from Iraq (20%), Kuwait (10%), and small amounts (less than 1% of the total) from Qatar and the UAE. Iraqi oil exports to the US fell sharply in 2002, to around 442,000 b/d, compared with 795,000 b/d in 2001. Saudi exports fell from 1.66 mn b/d in 2001 to 1.55 mn b/d in 2002. Overall, the Gulf accounted for about 22% of US net oil imports and 11% of US oil demand in 2002,” said the report.

Western Europe’s OECD countries averaged 2.3 mn b/d of oil imports from the Gulf during 2002, a decrease of about 400,000 b/d from 2001: “The largest share of Gulf oil exports to Western Europe came from Saudi Arabia (51%), with significant amounts also coming from Iran (27%), Iraq (13%) and Kuwait (6%).”

The harsh truth, however, is that less oil and gas was discovered last decade than any time since the forties (3).

I. Colonization: A Question of Moral Obligation.

To understand the new American policy just demonstrated in Iraq, one is strongly tempted to plunge into those works which extol classical colonialism. In “The Principles of Colonization and Colonial Legislation” (1927), Arthur Girault cites the speech “On Colonial Duty” delivered in 1897 by a certain Mr. Gide (no relation to the famous writer). There one reads: “Colonization is not a question of profit, but a question of duty. Colonization is necessary because there is a moral obligation incumbent upon peoples, as upon individuals, to use the powers and advantages they have received from Providence for the general good of humanity. Colonization is necessary because colonization is numbered among those duties incumbent upon great nations which they may not escape without failing at their mission and without incurring a real moral downfall.

II. A Description of a Recurrent Experience: Iraq 1910 to 1914 and again in 2003.

In Baghdad, an authoritarian regime, backed by military force, exercises a powerful grip over Iraq and poses a direct strategic threat to the interests of the major Western power in the region. A military expedition against the regime is mounted and, after a campaign that proves more difficult and costly than anticipated, Baghdad is captured and a new political order established under Western military and political control. But just as it seems that direct foreign rule is establishing the shape of the future for Iraq, rebellion breaks out among Iraqi army officers on the streets of Baghdad and throughout the Shiite centre and south of the country, putting the whole enterprise in jeopardy.

The uprising is eventually crushed, but the cost of doing that leads to a radical rethink in the army of occupation and in its government back home.

In place of the ambitious visions once entertained by the occupiers, a more modest, cheaper plan emerges. It recognises the existing socio-political hierarchy in Iraq and hands control of the state, under Western surveillance, to the administrative and military élites of the old regime.

This is not a prediction of the next 12 months in Iraq. It is a description of events that took place over 80 years ago, when Great Britain conquered the three Ottoman Provinces of Basra, Baghdad, and Mosul.

III. Oil: a Key Military Asset.

At that time, the British government, ruling over the largest colonial empire, already controlled newly-discovered oil in Persia (now Iran) through the Anglo-Persian Oil Company. Since Britain lacked oil in the home islands, British strategists wanted still more reserves to assure the future needs of their empire. An area of the Ottoman Empire called Mesopotamia (now Iraq), shared the same geology as neighbouring Persia, so it appeared especially promising.

Just before war broke out in 1914, British and German companies had negotiated joint participation in the newly-founded Turkish Petroleum Company that held prospecting rights in Mesopotamia. The war ended the Anglo-German oil partnership and it exposed the territories of the German-allied Ottoman Empire to direct British attack.

Sir Maurice Hankey, powerful Secretary of the British War Cabinet, wrote to Foreign Secretary Arthur Balfour during the war’s final stage, to argue that oil had become absolutely vital to Britain and that oil resources in Mesopotamia would be crucial in the future (4). “Control of these oil supplies becomes a first-class war aim” Hankey said enthusiastically, as British troops closed in on Baghdad. (5)

During World War I (1914-18), strategists for all the major powers increasingly perceived oil as a key military asset, due to the adoption of oil powered naval ships, new horse-less army vehicles such as trucks and tanks, and even military aeroplanes. Use of oil during the war increased so rapidly that a severe shortage developed in 1917-18 (6).

The strategists also understood that oil would assume a rapidly-growing importance in the civilian economy, making it a vital element in national and imperial economic strength and a source of untold wealth to those who controlled it.

With regard now to the present, the United States could find itself facing choices similar to those faced by Britain between 1914 and 1921 (7). It is worth reflecting upon those choices to understand whether the exercise of imperial power in the task of state reconstruction has a similar logic. This could throw light on the kind of Iraq which an American military occupation might bring into being.

When the British invaded Mesopotamia in 1914, they did not intend to create a state. Their immediate objective was the security of their position in the Persian Gulf. But military success led to greater ambitions and by 1918 British forces had occupied the whole of what is now modern Iraq. Throughout the territories a civil administration was established, and which was based on the model of British India where many of the officers and officials had gained their experience.

It was a mixture of direct and indirect rule: the enterprise was controlled by British-staffed ministries in Baghdad, but British political officers in the provinces depended upon local community leaders to guarantee social order and collect revenues. Excluded from these arrangements were the predominantly Sunni Arab or Arabized Turkish administrative and military élites of the former Ottoman state. A distinct British imperial order began to emerge, centred on Baghdad, gradually penetrating all levels of society and appearing to consolidate British interests.

But with the end of the war in 1918, different ideas about the nature of those interests surfaced in different branches of the British state. Some held to a strong imperial vision that believed that it was part of Britain's mission to practise the micro-technologies of power, to make society fit the new administrative order. Another view, influenced both by moral doubts about the imperial project and practical questions of resources and commitment, advocated a lighter touch (8). Here the argument was that Britain had only two basic requirements of any government in Mesopotamia: that it should be administratively competent and that it should be respectful of British strategic requirements. It was this view which triumphed and upon which the state of Iraq was founded (5).

Events in Iraq, as well as in the wider international sphere and in Britain, contributed to this outcome. In 1920 the principles of national self determination created the idea of League of Nations mandates-territories of the defeated Central Powers which one of the victorious powers would bring eventually to independence as sovereign states. The idea was taken up by those in the British government who wanted to maintain its global influence and control at minimum cost, financially, and militarily.

Unfortunately for the British, they had ceded much of the oil-producing area in northern Iraq to their French ally in the secret Sykes-Picot Accord of early1916, carving up the soon-to-be defeated Ottoman Empire (9). British diplomacy and military plans changed course to recoup what had already been given away. In August 1918, Balfour told assembled Prime Ministers of the British Dominions that Britain must be the “guiding spirit” in Mesopotamia, so as to provide a key resource that the British Empire lacked. “I do not care under what system we keep the oil,” he said, “But I am quite clear it is all-important for us that this oil should be available.” To this end, British forces raced to capture the key northern city of Mosul several days after the armistice was signed.
Britain thus outmanoeuvred the French, establishing a military fait accompli in the oil zone of Northern Mesopotamia.

The French, however, were furious. France, too, lacked oil fields in its home territories, and its politicians and imperial strategists saw Mesopotamia as a key resource for France’s future industrial and military might. In the months after the armistice, nothing caused greater friction between the two allies than the oil question.

Given the changing public mood in Britain in 1919-20 about the uses of public expenditure, and the alarm in government about the cost of empire, an ideal solution seemed to have been found (10).

In Iraq, many people resented the Mandate as a light disguise for British imperial control; by contrast, certain British imperial servants in the country saw it as a dangerous abdication of responsibility (11). The clash between these two views led to the Iraqi Revolt of 1920. This began in Baghdad with mass demonstrations of urban Iraqis, both Sunni and Shiite, and protests of embittered ex-Ottoman officers. The revolt gained momentum when it spread to the largely Shiite regions of the middle and lower Euphrates. Well-armed tribesmen, outraged by the intrusions of central government and resentful of infidel rule, seized control of most of the south of the country. It took the British several months, and cost thousands of lives - British, Indian and Iraqi - to suppress the revolt and re-establish Baghdad's control.

The revolt had two profound consequences. It persuaded the British that the cost of trying to rule Iraq would be too high and that it was imperative to set up a fully-functioning Iraqi government, army and administration. Furthermore, it made it almost inevitable that when the British looked for the cadres to govern the new state, they should choose the Ottoman administrative and military élites displaced during the war.

During the Versailles Peace Conference, British Prime Minister David Lloyd George and his French counterpart Georges Clemenceau nearly came to blows over Mesopotamian (Iraqi) oil, according to eyewitness accounts (12). US President Woodrow Wilson apparently intervened and only barely restrained them. Finally, in the secret San Remo Agreement of 1920, the two rivals agreed to give Britain political control over all Mesopotamia, in return for France taking over the German quarter share in the Turkish Petroleum Company.

All this happened before a drop of oil had been discovered in the disputed territory!

The French government was not satisfied with its secondary role in world oil, fearing the might of the big British and US companies. In an effort to strengthen and “liberate” France, the government in Paris set up the Compagnie Francaise des Pétroles in 1924 to take up the French share in Mesopotamia, now a British colony (11) renamed Iraq . Further French legislation in 1928 referred to the company as an instrument to curtail “the Anglo Saxon oil trusts” and to develop Mesopotamian oil as a strategic resource of the French empire.

The uneasy settlement between the British and the French did not end the great power dispute over Iraq’s oil, however (13,14). The United States Government and US oil companies were furious at the Anglo-French agreement, which left nothing for them! Before the end of 1920, following the companies’ strategic prompting, the US press began to denounce the Anglo-French accord as “old-fashioned imperialism.” In Washington, some talked of sanctions and other measures against these ungrateful recent allies. Relations between Washington and London cooled swiftly and a young State Department legal advisor named Allen Dulles (15) drew up a memorandum insisting that the Turkish Petroleum Company (TPC) concession agreement with the dismembered Ottoman Empire was now legally invalid and would no longer be recognized by the United States.

Soon London bowed to this transatlantic pressure and signalled that it was ready for a deal that would give the US a “fair” share. In response, Washington told its major oil companies that they should act as a consortium in future negotiations. Walter Teagle, Chairman of Jersey Standard (later Exxon), the biggest US company, took the lead role as negotiator for the consortium. Thus began lengthy secret talks in London. No oil had yet been found, but prospects had brightened.

In October 1927, the British exploration team under D’Arcy hit a gusher, proving oil reserves in large quantities near Kirkuk in northern Iraq. In July 1928, the quarrelling parties finally reached a famous accord, known as the “Red Line Agreement,” which brought the US consortium into the picture with just under a quarter of the shares and an agreement to jointly develop fields in many other Middle East countries falling within the red line marked on the map by the negotiators.

Throughout this phase, as in all later phases of Iraq’s oil history, Major international powers combined national military force, government pressure and private corporate might to win and hold concessions for Iraq’s oil (16) The defeated and dismembered Ottoman Empire and its defeated ally Germany lost all oil rights they might otherwise have claimed. At the same time, the three victors of the war, Britain, France and the United States, shared out Iraqi oil among themselves on a basis of relative power. The dominant colonial power, Britain, came out with nearly a half share, while the two lesser powers on the regional stage, the US and France, each won close to a quarter share.

The British saw certain men as having proven experience in running a modern state, as well as having a pragmatic grasp of the importance of Britain in helping them to entrench themselves in power, and in securing Iraq in the region (17). The leaders of the majority Shiite population and of the substantial Kurdish minority, however, were seen as potentially mutinous, as well as too encumbered by tribal and religious traditions to govern a modern country.

These considerations shaped subsequent British policy in Iraq. Amir Faisal of the Hijaz was installed as king, sustained by mainly Sunni Arab former Ottoman officers and officials. They took over the administration from departing British officials and formed the backbone of the new Iraqi officer corps. British influence continued through its advisers in the Iraqi ministries, through its two major air force bases in the country and through the multiple ties which bound the two countries together and sustained Britain's informal empire even after Iraqi independence in 1932.

In the sense of safeguarding British strategic interests, the advocates of the minimalist or indirect approach to the question of political order in Iraq appeared to have been vindicated. However, they had also laid the foundations for a distinctive form of state in Iraq (18). This was affected both by the authoritarian inclinations of the new governing class, as well as by their prejudices towards the diverse communities who formed the majority of the Iraqi population (15).

The relevance of this to the present situation is not only that Saddam Hussein's regime is a direct descendant of this pattern of government. It is also that the temptation confronting the US, if and when it tries to organise the future of Iraq, may be similar to that which faced the British government and its officials in 1920. In the aftermath of a military invasion and the overthrow of Saddam Hussein's regime, the US will face a choice.

IV. Ideology Enforcing Strategic Reasons.

After the Second World War, the Americans would, moreover, support anti- colonial movements, both for ideological reasons - peoples’ rights to self-determination, and strategic reasons. The loss of their overseas possessions signalled the definitive enfeeblement of the great European powers, especially of France and Great Britain (19). Contemporary imperialism, of which Americans are the primary if not the sole practitioners, aims neither at the conquest of territories to be colonized, in the strict sense of the term i.e. to be inhabited by colonists from the mother country, nor at the direct exploitation of natural resources. Globalization of the economy no longer requires direct political control of the periphery by the centre.

“The same accents may be heard among George W. Bush and his neo-conservative animators. The messianic propagation of political and economic liberalism is among the duties of the greatest democratic power of the twenty-first century, and, like nineteenth century colonization, it aims toward “the general goo” of humanity. Beyond this generalization, the differences outweigh the similarities. The nineteenth century powers, who transferred at least some of their rivalries to the colonized peoples, were primarily European, the United States participating in the formation of these empires only on their fringes (20).

This imperialism is essentially ideological. It aims at spreading democracy as the best form of political organization. American neo-conservatives are convinced that the development of democracy serves the security interests of the United States and international peace, because democratic nations are naturally less aggressive than authoritarian regimes. This liberal imperialism is not entirely new. In recent history, its first manifestations date to the nineties. At the time of the war in Kosovo, Tony Blair defended the idea of a
“new internationalism” based on the defence of human rights (21). The British Prime Minister took up on this score by enlarging the right of humanitarian interference to make it a doctrine of the West's New Left, which tried to re-group around Bill Clinton and European Social Democrats.

V. Evolving paradigm.

It would be simplistic, however, to stick a nineteenth century paradigm, even a 1920's one, onto today's American policies (22). George W. Bush's liberal imperialism is situated in a post-modern framework, well described a year ago by the British diplomat, Robert Cooper, while he was still a consultant to Tony Blair and before he became a colleague of Javier Solana, the Head of European Foreign Policy.

After reviewing the different forms of international organization since the empires, the Westphalian Order, and the division into two blocs until just after the Cold War, Robert Cooper characterized three types of nation: pre-modern nations, often former colonies, which have not succeeded in establishing internal order and are ravaged by internecine warfare; Post-modern nations, which perceive their security neither in terms of conquest nor of relations of power, but which have accepted the transfer of a part of their sovereignty to supra-national bodies; and in-between the two: classic nations, which continue to think in terms of strictly national interest and reasons of state. According to Robert Cooper, the best example of a post-modern structure is the European Union, a sort of “co-operative empire” which organizes a space of common freedom and security (23) without any ethnic group or a centre dominating, as was the case in the classic empires. This post-modern imperialism is multilateral and is only expansionist to the extent that it must assure the stability of its immediate neighbourhood. However this expansionism is based on desire and the attractiveness of the model, not on constraint. This principle is illustrated by the enlargement of the European Union to incorporate the nations of Central and Eastern Europe.

The post-modern empire must, however, confront disturbances from pre-modern nations and challenges posed by classic nations. In his essay entitled, “Restoring Order to the World; Long-term Implications of September 11” (Foreign Policy Centre), Robert Cooper primarily studied Europe, but his reflections could be applied to the United States. “The post-modern world”, he wrote, “must be ready to use the method of two weights, two measures: among ourselves, we act according to the rule of law and the principles of co-operative security. However, faced with more traditional kinds of nation, we have to revert to the more brutal methods of the past: use of force, pre-emptive attacks, deception, all that may be necessary to confront those who still live in a nineteenth century world of every nation for itself. Among ourselves, we respect the law, but when we operate in the jungle, we need to apply the laws of the jungle."

The American right was then still more self-absorbed. What difference did it make what kind of regimes were in power as long as they were friends with the United States (24). This axiom was notably valid for the Middle East. Since the attacks on the World Trade Center, it no longer guides George W. Bush’s policy.

At a seminar in Granada in Autumn 2002 organized by New York University, Arab students were already up in arms against the crusading spirit they detect in American policy post-September 11. They reject Western “patronization” of the democratization of their countries, democratization for which a number of them have personally fought and been imprisoned. They warn against the perverse effects of a democratization imported from and invented elsewhere. They are outraged that Americans “insist today on democracy in the Middle East as emphatically as they insisted on forgetting it for years” (25).

Arab intellectuals were not the only ones to question the legitimacy of the premises of liberal imperialism. At the same time, in an interview with the leftist weekly, “The New Statesman”, British Foreign Affairs Minister Jack Straw, acknowledged that in the Middle East, “many problems we are dealing with today are a consequence of our colonial past. We, the British, designed the strange borders of Iraq... an interesting, but not necessarily honourable history”, he concluded.

Contemporary American imperialism may be qualified as “liberal”: it aims at the installation of representative governments in law-based nations in conquered territories it does not intend to occupy on a permanent basis (26). Nevertheless, in other respects, it is more comparable to classical than to the “post-modern” imperialism described by Robert Cooper.

Not satisfied to operate pre-emptively and wilfully only against those who won’t play the game, George W. Bush and his associates refuse to play the game with those nations which concentrate on establishing “co-operative security” (rejection of the Kyoto agreement, of the International Criminal Court, of the Prohibition Against Chemical Weapons, or against anti-personnel mines, etc.)... as if the status of hyper-power could not adapt itself to post-modernism.

One can try to bring about a fundamental change in the way Iraq is Governed and commit the time and resources necessary to make that happen. Or one can set up an Iraqi administration which will carry out the principal wishes of the US, respect for American strategic interests and maintenance of order, thereby allowing an early withdrawal of US forces. This would mean recognising much of the existing power structure in Iraq, as well as the narrative of Iraqi history that brought the present regime into being (27,28). Faced by internal resistance and fearful of risking American lives and resources in a project of state reconstruction increasingly remote from the interests of the American public, it is quite possible that the US administration would opt for disengagement from Iraq's internal affairs.

This might contradict the present declarations being made in Washington promising a mission to transform Iraq into a beacon of democracy in the region. It would certainly cause despair among those Iraqis who have seen the US as their main hope of radical political change. But for the US, short term advantages may outweigh the possible future benefits of fundamental social transformation in Iraq.

VI. Regional and Geostrategic Implications - China is a Factor.

What’s next Syria? Iran? In fact, what lies ahead is far more ambitious than any single military operation. The Bush doctrine proposes that the united states foster the spread of classical liberalism, its institutions and values, in order to undermine dictatorships ruled by terror and ultimately to replace them with just, representative societies.... (29)

In strategic terms, China had good reason to be opposed to or at least not in favour of the US-led war against Iraq. It is concerned that a US victory over Iraq would give the US a tighter grip on Middle East oil, with oil from Iraq, Saudi Arabia and Iran - another key source of China’s oil imports, all increasingly controlled by the US (30). As China’s reliance on Middle East oil increases, the Middle East gets more strategically important to China, hence China’s worries and concerns.

It is estimated by the government that the rise of the oil price by $10/b will cut China’s economic growth by 1%. For example, the international oil price rise in 2002 reduced China’s GDP growth by 0.5% (31).

The Iraqi issue has in fact affected China’s oil security even though China imports little oil from Iraq and no reports of oil imports from Iraq for the year 2002 are to be found in China’s National Customs Administration. Yet, oil price rises related to Middle East tensions inevitably lift China’s oil imports bill (32). According to customs statistics, China witnessed its first trade deficit in its foreign trade history in January 2003 due to the rise of the oil price. In January, China’s import of crude oil amounted to 8.36 mn tons, up 77.2% from the corresponding period last year, with an average import cost up by 51% resulting in a net import cost increase of $1.10 bn. The rapid growth of oil imports and the rise of oil prices are the major elements behind the trade deficit.

In recent years, Middle East oil exports to China have become more and more prominent, even though China does not have any strategic interest in this area. Nevertheless, the Iraqi issue has posed an enormous test, the first of its kind in the new century, to China, a country attaching more and more importance to energy security (33). China imported a total 89.75 mn tons of crude oil and oil products in 2002, out of which crude oil accounted for 69.41 mn tons, up by 15.2% from the previous year with an import amount reaching $12,757 bn. Oil products imports reached 20.34 mn tons or $3.799 bn. Statistical figures clearly show that nearly 60% of China’s imported crude oil is from the Middle East with Saudi Arabia, Iran and Oman being the top three, or 11.53 mn tons, 10.73 mn tons and 8.31 mn tons respectively, making it a total of 30.57mn tons accounting for 43.3% of China’s import of crude oil. In other words, China imports over 700,000 b/d from the Middle East. The war on Iraq exposed China’s imports of at least 700,000 b/d to direct war threats and exposed the country’s sources and channels of oil imports to war risks.

Since the end of the Cold War and the fall of the Soviet Union, while China’s diplomacy has been aimed at ensuring and maintaining the stability and security of the Euro-Asia Continent (neighbouring countries, former Soviet Republics in particular), adequate attention is also diverted to the encircling trend resulting from the US containment of China by establishing and fortifying its spheres of influence along China’s borderline and coastline (34,35).

As the curtain of the 21st century draws open, China’s diplomatic achievement is remarkable in terms of its friendly relations with its European and Asian neighbours. Taking the advantage of the Shanghai Co-operation Organization (SCO), China has established political, economic and security relations with Russia, Kazakstan, Tajikistan and other former Soviet Republics. Meanwhile, China’s relationship with India has also improved without hurting its traditional friendship with Pakistan. Nonetheless, after the 11th September events, China’s security environment is more symbolic than realistic. The US-led anti-terrorist war in Afghanistan brought US influence into Central-Asian nations; agreements reached between the US and Russia on energy and other areas seem to indicate that a more co-operative relationship between the two countries has been built up with regards to issues like NATO’s expansion eastwards, anti-ballistic missiles and the transfer of sensitive technology. The US has set up a bridgehead in China’s southwest backyard, posing a serious direct threat to China’s political, economic and military security and a potential threat to China’s energy security. Under this circumstance, oil supply to China from Central Asia is much affected by the US.

The Chinese government is well aware that some American scholars and congressmen are keen on advocating such a “China Threat” to incite Asian countries, creating tension in northeast Asia and at the same time, oblivious to China's opposition, amending the US-Japan Defence Guidelines, and expanding the sphere of US-Japanese military co-operation. All these are detrimental to China's reunification program and the stability in east Asia. After the accomplishment of containing China by the two wings, eastern and western, the US turned to strengthen its diplomatic antenna in Southeast Asia in an attempt to ensure an absolute control over the oil in this area. The logical deduction is quite evident: to control oil in the Middle East and Central Asia... One has to control South Asia first because it is an important doorway to Central Asia and a sideways door to the Middle East. The control of India is the control of the throat of oil imports by Asian and Pacific countries; the control of Pakistan is the control of the entrance of Central Asian oil into the Gulf. Now, the US has succeeded in seizing the initiative of the geopolitical struggle in the two important regions.

To the US, the control of the Middle East and Central Asia means the control of world oil; the control of oil means the control of the world. So therefore, it is of vital importance for the US to control shipping routes from the Gulf, southward to the Arabian Sea, westward to the Indian Ocean, through the Strait of Malacca and the Strait of Taiwan and finally to China and other oil-consuming countries. The US-Japan “Defence Co-operation” has already included China’s Taiwan in its coverage as a peripheral area. China, once at a loss to control the development of the Taiwan issue, will be at a loss to control entry points into the sea even within its own sovereignty, being once again thrown into an island-rim encirclement. On the other side of the issue, the US has taken a series of military measures to ensure oil security in the Middle East and Central Asia: keeping a large army permanently in the Middle East; maintaining military bases in the Gulf for military demonstration, deterrence and peace-keeping in peacetime and for military operations in war time. If needed, enforcement from troops stationed in Europe and East Asia is quickly available. Readjusting theatre command systems is another important step of the US military. Early in October 1999, the US Defence Department transferred the commanding power of the US forces in Central Asia from the Pacific Theatre to the Central Theatre. This symbolizes the transformation of the US strategic focus. Today, after the US-led war on Iraq, China is more concerned over its oil security. Once the Sino-US relationship is out of control, China’s oil supply will have to face up to the possibility of being cut off by the US. The fact that China’s oil import has to be undertaken in the eyes of the American military forces in the Middle East and Southeast Asia worries China most.

VII. Saudi Oil Capacity: Any Limit in Sight?

Saudi oil minister Ali Naimi told a US audience in Washington in April 2002 that his country could increase production from its then current 7 million b/d to 9 million b/d in less than two weeks, and to a full 10.5 million b/d in 90 days (36). At OPEC’s Jan. 12 emergency meeting in Vienna Naimi said Saudi Arabia could produce 10 million b/d within two weeks. Some believe as much as a third of a billion dollars was spent to speed up production restart. But some of Naimi’s 10 million b/d is suspected to be surge capacity, primarily from:
The super-giant 110 billion bbl Ghawar field, the world’s largest oil field: 34°API, 1.78% sulphur, Arab Light blend.
The offshore Zuluf field: 31.8°API, 2.45% Sulphur, Arab Medium.
The 19 billion bbl offshore Safaniya field, the world’s largest offshore field:
28.7°API, 2.79% Sulphur, Arab Heavy.
The Arab Super Light 50.6°API, 0.04% Sulphur.
The 2 billion bbl Shaybah field in the Rub-al-Khali region of south-eastern Saudi Arabia.
The 13 billion bbl Berri and 9 billion bbl Abqaiq coastal fields east of Ghawar: 38.4°API , 1.16% Sulphur. Arab Extra Light.

VIII. OPEC’s Continued Stabilizing Role

Mr. Naimi then turned to the role of OPEC against the background of changing political and market circumstances (37). Some people, he said, were pleased to announce the imminent demise of OPEC after the outbreak of the Iraq-Iran war, or the Iraqi invasion of Kuwait, or the price collapses in 1986 and 1998. “We are again hearing voices announcing the end of OPEC or a diminishment of its role following the ending of the war on Iraq. Some are expecting that the return of Iraq’s ability to produce and export will happen without co-ordination with OPEC, or even with its withdrawal from the organization”. “These hasty conclusions are based on inaccurate political hypotheses and ignorance at the nature of the market. Iraq is a founding member of OPEC and Baghdad was the birthplace of the organization. Iraq, like other OPEC and non-OPEC producers, is keen to achieve fair and stable income from its oil resources, especially for reconstruction and the rebuilding of its oil production capacity. There is no doubt that safeguarding the unity and well-being of OPEC and its role in stabilizing the market at a price appropriate to achieve economic and political stability for Iraq and others is a matter of utmost concern for all its members”. OPEC, in the various stages of its history, has taken practical measures to cope with supply disruptions from its members no matter what the cause and with the resumption of supplies afterwards. The cut in supplies after the Iranian revolution, after the Iraq-Iran war, during the occupation of Kuwait, the crisis in Venezuela, and recently during the war on Iraq all these were dealt with collectively within the organization, as was the case when production and exports from these states resumed after the crises had ended. And I do not see any reason why the situation should be different when Iraqi production and exports get back to normal.
“I am certain that there is a continuing role for OPEC, given the expectations for supply and demand that I indicated and which will see an increased share for the organization in the market in the coming two decades. So there is scope for all the states in the organization, including Iraq, to gradually expand production to meet market needs”.

All contracts signed or under negotiation between the previous Iraqi regime and international oil companies (IOCs) will be assessed, according to the CEO of the oil sector advisory board, Philip Carroll, the new spokesman for Iraq. In an interview with the Washington Post published on 17th May, he said there would have to be an evaluation by the ministry of those contracts and a determination of whether they were made in the best interests of the Iraqi people. “Certainly, where contracts are, shall we say, excessively beneficial to one party, and that party is not the Iraqi people, and there is a legal basis for not going forward, then I would expect that the ministry would want to have another look”. Mr Carroll, in the Washington Post interview, also said that Iraq might be best served by disregarding OPEC quotas and producing as much oil as it could. “Historically, Iraq has had, let's say, an irregular participation in OPEC quota systems. They have from time to time, because of compelling national interest, elected to opt out of the quota system and pursue their own path. They may elect to do that same thing. To me, that’s a very important national question” (38).

The following extracts from a paper, lays out the thinking of the Iraqi Oil and Energy Working Group (Oil Policy Subgroup), which has drawn up proposals under the auspices of the US State Department Future of Iraq Project (39). The group, comprised of Iraqi experts and US officials, met several times between December 2002 and March this year.

Conceptual Guidelines for Iraq’s Oil Industry And Global Trends:
• “(...) the oil production yields of the 18 largest oil producing countries in the world (...) it was noted that five of the six countries with the highest oil production yields have decentralized oil industries, and that by contrast, five of the six countries with the lowest production yields have highly centralized oil industries dominated by their politically controlled, monopolized, nationalized oil industries. We suggest that this is no coincidence”.
• “There has been a massive trend to privatization or at least de-monopolization of national oil companies throughout the world and we are unaware of a single instance of re-nationalization or re-monopolization of a national oil company”.
• “National oil companies served a purpose in a world in which market imperfections enabled major oil companies to abuse their political, financial and market power. That time has passed. Markets are broader and deeper. Major (competitive, private sector) oil companies have adapted to the realities of the market. National oil companies that are protected by monopoly rights have not. In today's oil markets, monopolized national oil companies are an anachronism. They no longer serve the best interests of their countries. Rather, as illustrated by the analysis of oil production yields, their inherent inefficiencies, born of their protection from competitive forces endowed by their monopoly status, cost the countries in which they survive billions of dollars each year from foregone production”.
• “National oil companies in many oil-producing countries inherited the responsibility to manage oil industries nationalizing foreign oil companies’ interests. In some cases, including Iraq, they spectacularly increased proved reserves of oil and historically they increased production. The data irrefutably demonstrate however, that the national oil companies, where they have survived, are now so unsuccessful at increasing oil output that the governments and rulers of oil producing countries are without exception turning to foreign oil companies to implement their oil production expansion programs”.
• “OPEC production constraints are not the issue here. Quota constrained, declining output notwithstanding, Middle East OPEC members, eying projections of significantly increased demand for their oil over the next 20 years (EIA and lEA forecasts for example), are initiating oil development programs to increase their production capacity. Contrary to the sometimes heard assertion that foreign oil company participation has not spread to the Middle East, the reality is that all Middle East OPEC members have turned to foreign oil companies in their efforts to increase oil production capacity (except Saudi Arabia which already has 3.45 mn b/d spare capacity that can be brought on-stream within 90 days. Saudi Arabia has however turned to foreign oil companies to implement its massive gas development project just as it turned to foreign oil companies to establish its petrochemicals industry)”. This initiative has failed (the Editor).

• “Foreign oil company participation takes various forms: license and royalty, production sharing agreements (PSA), service agreements (including buy back agreements), joint ventures or other forms of direct equity ownership. It must be emphasised that in all of these cases the state retains ownership of the mineral rights, of the oil in the ground and, one way or another, receives economic rent from the oil companies for their contractual right to exploit those resources, whether the contractual right is granted to a national oil company, or under a PSA, or to a privatized oil company”.
• “A common form of foreign oil company participation is through PSAs. Under these arrangements, the oil is owned by the state, which brings in an oil company to explore and develop the resource. The oil company operates at its sole risk and expense, and in return, if commercial production ensues within the duration of the agreement, receives a share of production. Key attractions of production sharing agreements to private oil companies are that although the reserves are owned by the state, accounting procedures permit the companies to book the reserves in their accounts, but, other things being equal, the most important feature from the perspective of private oil companies is that the government take is defined in the terms of the production sharing agreements and the oil companies are therefore protected under a PSA from future adverse legislation”.
• “More important than the specifics of oilfield development plans negotiated during the period of the dictatorship, in the event of a regime change, these are the most coherent development plans available. The new oil minister will be under enormous pressure to initiate programs to increase production rapidly and massively. By default, the existing plans may be implemented albeit with different foreign oil companies. Accordingly, after its demise, the dictatorship will continue to exert enormous (albeit posthumous) influence over the oil industry and hence over the economy”.
• Iraq’s oilfield development program announced in 1997 under which production sharing contracts, service contracts and joint ventures have been negotiated with French, Russian, Chinese companies, (and reportedly with Italian, Spanish, Indian, Turkish, Vietnamese, Algerian, Indonesian, and other oil companies) provided for the development of 33 fields containing
50 bn barrels of reserves and potential production of 4.65 mn b/d. Of the 33 fields 25 have been appraised but never developed. The output potential of these 25 fields is 3.75 mn b/d.

IX. The Emergence of a New Oil Industry Structure

“The starting point of this paper, the Oil Policy Subgroup is that Iraq’s enormous reserves of oil and gas are the endowment, patrimony, and birthright of the Iraqi people. This endowment is managed for the Iraqi people by the state. In the new, liberated Iraq, the focus of oil policy at its most fundamental, should be to derive the maximum obtainable benefits from Iraq’s enormous hydrocarbon reserves and deliver these benefits to their owners, the Iraqi people”.
• Formulation of oil policy recommendations for Iraq can only be enriched by due consideration of recent trends in the international oil industry. In that regard the following observations have particular relevance:
I. The least efficient oil industries, in terms of production yield, are those with highly centralized national oil companies with domestic upstream monopoly rights.
II. Denationalization and de-monopolization of oil companies is a well-established trend.
III. Throughout OPEC member states and throughout the Middle East, governments are turning to private international oil companies (rather than to their NOCs) to implement their oilfield development programs.
Finally and perhaps to encourage and hesitating Iraqi decision, the following reminder speaks for itself “Billions of dollars of international and domestic capital has been withheld from the Russian oil industry as their policy makers stalled in the enactment of enabling legislation”.

On May 28th 2003, OPEC snubbed the US and its interim administration in Baghdad by declining to invite an Iraqi representative to a meeting in Qatar next month. Inviting Iraq to the meeting would have represented the tacit recognition by Arab states of the country's US-backed interim administration. But the decision came as an affront to the US because it was made by Washington's closest allies in the region, including Saudi Arabia and Kuwait.

"No legitimate government was formed in Iraq," said an official from one of OPEC’s 11 members. "This guy (Thamir Ghadhban, the US appointed head of Iraq's oil ministry) does not represent the Iraqi government."

Asked for comment, the US State Department said Iraq's future participation in OPEC was for a future Iraqi government to decide and the US had no intention of prejudicing that outcome.

The snub came to light shortly after Mr Ghadhban made it clear that he was in favour of Iraq remaining a member of OPEC. □


“Post-modern Imperialism” by Daniel Vernet. Le Monde,April
24, 2003
(5, 19, 20, 21, 22, 23, 24, 25, 26)

“Iraq: The Imperial Precedent” by Charles Tripp, from Le
Monde Diplomatique, January 2003.
(11, 7, 8, 10, 17, 18, 27, 28).

“Great Power Conflict Over Iraqi Oil: The World War I
Era” by James A. Paul, Global Policy Forum, October
(15, 4, 6, 9, 12, 13, 14, 16).

“What’s Next? Preserving American Primacy, Institutionalizing
Unipolarity” by Thomas Donnely, National Security
Outlook, May 1, 2003.

“Oil: The Next Conflict In Sino-US Relations?” by
Professor Wulei, Yunnan University, Kunming, China,
Mees 26 May 2003.
(30, 31, 32, 33, 34, 35).

Mees 5 May 2003,

“It’s in the Mix” Petroleum Argus, 3 March 2003.
(1, 3).

“Capacity to Confound And Amaze” Oil Market
Intelligence, 4 April 2003.

Mees 26 May 2003,

Mees 5 May 2003,
(38, 39).

Volume 2, Number 7, April 2003, “Divide and Conquer: A New International Oil Order”

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Volume 2, Number 7, April 2003

“Divide and Conquer: A New International Oil Order”


• Reshaping the Middle East
• US Overview of the World Energy Scene
• Competition for Investments in Post-War Iraq
• Jostling for Position
• The War on Terror and the Next Phase
• Industry wants High Prices rather than Growth

Editor: Stuart Wilkinson
Director: Mazhar Al-Shereidah

“Divide and Conquer: A New International Oil Order”

The war has now been won, but a fundamental tension is perceived to be at the heart of US policy in the Middle East. Unresolved, this problem will leave the world’s most important oil region trapped in the same mire of political backwardness that has persisted since the end of the colonial period. How to secure the long-term stability of the region without unleashing the very forces of destabilization that threaten it now. The region’s post-colonial status quo has created stagnation and left the mosque as the only outlet for disaffected youth.
The power of the US in the Middle East has never been greater, but Washington’s moral authority with the people has never been lower, and the Bush administration’s deep ideological commitment to Israel’s Likud Prime Minister, Ariel Sharon, has turned the situation critical.
The outside world needs to see democratization across Arab nations as the key defence against instability and a guarantor of oil supplies. Winning the peace, however, will be a lot more difficult than winning the war. (1)

Reshaping the Middle East...

Many Europeans are frustrated with, if not baffled by, the Bush administration’s approach to the Middle East (2). However, the Bush administration does have something of a Middle East vision based on more than domestic political considerations. At the heart of the plan is the determination to use America’s unprecedented power to reshape the Middle East supporting America’s friends in the region, opposing its enemies and seeking to promote democracy and freedom. This means using force and standing by a particularly American optimism about being able to reshape the world through the application of American power and ideals – but the President himself seems to be sold on it. It is important to understand and take seriously the new thinking in Washington.

There are at least four main assumptions behind Bush’s strategy for the Middle East, first is that the status quo has become unacceptable. It has now become a problem for Americans themselves. Another aspect of the status quo that Bush feels must be changed concerns Iraq. The sanctions that Saddam wrongly but successfully argues are the cause of Iraq’s humanitarian problems, and the troops in Saudi Arabia contribute directly to the anti-American and anti-Western sentiments that fuel Islamic terrorism. a status quo that itself creates a serious threat to the West.

A second assumption underpinning the Bush approach is that Iraq’s development of weapons of mass destruction poses an unacceptable threat that would make long-term peace and stability in the region impossible.

While it is true that Saddam is unlikely to have any interest in co-operating with Islamic terrorists – who are as much his enemy as America’s – he has also demonstrated a desire for vengeance and hatred for the US that for Americans with a traditionally low tolerance for vulnerability and a fresh memory of the large-scale killing of 11 September and the anthrax attacks that followed, living with that risk is unacceptable.

In 2000, in the Bush view, Clinton gambled on the Camp David summit, pushed the Israelis to offer more than they ever had before in the name of peace, himself put forward proposals (the December 2000 “Clinton parameters”) that may have exceeded what Israeli domestic politics would accept – and still the response from the Palestinian side was terrorist violence, supported by Yasir Arafat himself. Bush’s own tentative foray into Middle East peacemaking – the sending of envoys Colin Powell and Anthony Zinni both met with more Palestinian violence – pushed him back to his original, “hands-off” approach.

The final assumption behind the administration’s vision for the Middle East is that in the long run, peace and stability – and an end to anti-Western terrorism – will not be possible until the region’s regimes become more democratic.

Many of the key thinkers behind the Bush administration approach are imbued with a neo-Wilsonian sense of idealism that rejects European “realism” or cynicism about the possibility to spread freedom and democracy in the Arab world. Just as “we” defeated Nazi Germany and Imperial Japan and then installed democratic, pro-Western regimes there, and just as we defeated communism and spread democracy and freedom to Eastern Europe and Russia, the next task is to do so in the Middle East.

The more realistic members of the Bush administration are aware that implementing this grand vision will not be smooth or easy. There will be setbacks along the way and the final product will inevitably be incomplete. But they think they know what implementation entails.

The first step in the process would be regime change in Iraq. It would allow for the lifting of sanctions on Iraq and the rebuilding of that country’s oil production network, generating billions of dollars of revenue to be spent on the Iraqi people. It would reduce the need for American troops in Saudi Arabia. By developing Iraq’s vast oil potential over the long term, it would lessen America’s dependence on Saudi Arabia, allowing the US more easily to press for political reform there. Finally, the Bush team believes that the elimination of the Iraqi regime will send a decisive message to friends and adversaries alike throughout the Middle East: The second phase in the project would be an Arab-Israeli peace. The Bush team, his 24 June 2002 Rose Garden speech held out the vision of a recognized Palestinian state.

Bush began to do this in his January 2002 State of the Union speech, in which he not only denounced the “axis of evil” that included Iran and Iraq, but also called for sweeping political change in the Arab world many in the Bush team like to recall similar scepticism when Ronald Reagan denounced the Soviet Union as an “evil empire” and called for democracy and freedom there. Indeed, Bush explicitly cites the example of Reagan. Other administration officials, Secretary of State Colin Powell and his Policy Planning Director Richard Haas, have also begun to speak about the need for the US to support democracy in the Muslim world. In a 4th December 2002 speech to the Council on Foreign Relations, Haas argued that previous Democratic and Republican “US policy will be more actively engaged in supporting democratic trends in the Muslim world than ever before.”

However, there are plenty of reasons to be sceptical about Bush’s grand vision.
The assumptions behind this scenario; that an American occupation of Iraq will over the long-term be accepted in the Arab world; or that the US will really be able to impose stability and democracy in an artificial state that has never had much of either – are extremely optimistic at best and irresponsible at worst.

It is also excessively optimistic to think that defeating Iraq will somehow convince the Palestinians and their supporters in the Arab world that their struggle is futile and that their only choice is now to bow to the new regional power – the US – and its Israeli ally. Indeed, while it is true that Saddam’s defeat in the Gulf War and the collapse of the Soviet Union were in part responsible for the Palestinian decision to accept the Oslo peace process, neither these factors – nor for that matter the defeat of many other Arab regimes over the years – have prevented the Palestinians from continuing their struggle today, more violently than ever.

While making Ariel Sharon the most frequent visitor to the Oval Office; doing nothing to oppose Israeli settlement activity; calling Sharon a “man of peace” (a moniker it is not clear that Sharon himself would choose); allowing cabinet officials like Defence Secretary Donald Rumsfeld to refer to the “so-called occupied territories”; and failing even to appoint a high-profile Middle East envoy (or even, until December 2002, a senior official at the National Security Council to focus on the issue) does give the impression to the Arab world that the US is not an honest broker in the conflict .

It will also be hard – indeed it would be risky – to try to change the nature of the regime in a place like Saudi Arabia, so long as the US remains extremely dependent on the Saudis to stabilize the world oil market, as is likely to be the case for a very long time. Changing the forms of government in the Middle East is also problematic because in most cases, there is little prospect in the near-term of replacing the current leaderships with anything better (and the real imposition of democracy anytime soon could produce Islamic or other regimes that might be even more anti-American or anti-Israeli than the current ones.)

But the US must also be realistic. While it is fine for the US to talk about democracy and freedom in the Arab world, Bush is unlikely to achieve it during his presidency, or even his lifetime.

Much of the Bush vision, then, is problematic and, in the best case, will take generations to realize. Some of the assumptions are wrong, Neither the Bush administration nor anyone else has all the answers in the Middle East

US Overview of World Energy Scene...

Broadening out the context, US Under-Secretary of State for Energy, Alan Larson, speaking at New York University on 4th March 2003 outlined the United States’ view of the global energy situation:

• Energy remains a vital ingredient in the modern industrial economies where roughly one billion of the world’s people live. Over the next 50 years, rapid economic progress in the rest of the world will require expanded supplies of energy, including oil and gas.

• It would be naïve to believe that continued strong economic growth in the US and dramatic progress in reducing global poverty can be achieved without substantially increased supplies of energy (3).

• The transportation sector has been the Achilles’ heel of oil conservation.
• Over the next generation, oil and natural gas will continue to play a central role in the world economy and international energy markets.

• We must find more oil and gas supplies, and these supplies must be reliable and made available at prices that permit sustained economic growth.

• Energy independence was a mirage and energy security had to be pursued in co-operation with friends and allies.

• We knew that two-thirds of the world’s known oil reserves were in the Middle East.

• We knew that imports were supplying roughly half of our oil needs, and an even greater share of the needs of some of our most important allies and economic partners.

• We knew that OPEC nations were providing roughly one third of the total oil exports, but also controlled two-thirds of world reserves.


• Depending on political events there, Venezuela could be a source of expanded oil and gas production.

• Closer to home, Venezuela and the US have also enjoyed strong historical energy ties. Traditionally, we had considered Venezuela to be one of our most reliable oil partners, and we still very much want this to be the case. Venezuelan oil policy, until recently, has been built upon a reputation of reliability to international markets, which was of great mutual benefit.

• Through World Wars, politically inspired embargoes, and global dislocations, Venezuela found that its national interest was best advanced through maintaining a reputation of reliability. Unfortunately, through a collective failure to come to consensus within the boundaries of their political system, it has been clearly demon-started that Venezuela’s democratic institutions and its reputation in the US as a reliable supplier appear no longer matters of primary importance to President Chávez, PDVSA or the political opposition.
• US firms continue, of course, to be hard at work in Venezuela, and CITGO continues to operate in the US as a commercial entity. The benefits that these reciprocal energy investments bring to both parties, and to the relation-ship, are clear to me but they do not seem to be clear in Caracas. The US will continue to work to help Venezuelans resolve their political differences. We are disturbed by measures taken by President Chávez and the Government of Venezuela that can only be seen as polarizing the conflict and eroding Venezuela’s democratic institutions

• However, until a sincere political compromise is achieved, and the level of rhetoric lowered, world energy markets simply cannot view Venezuela with the same certainty that they once did, and, sadly, neither can the US. The damage done cannot be repaired overnight. And when the Venezuelan parties show a commitment to seek reconciliation and restore their position as a reliable partner of the US, they will find a willing and ready partner in the United States.

On this, the Washington DC-based PFC Energy’s Market Intelligence Service on 24th. February (4) considered that next year could be more difficult: “PFC Energy expects lower oil prices following a US-led war with Iraq. With the prospect of ever-larger deficits and lower foreign assets, the likely response of the government will be to open up the oil and gas sector,
However, pressure from overseas will temper the government’s actions. Chávez’s government still needs to maintain some level of cordial relations with the US.
But, it is extremely vulnerable to an oil price collapse in 2004 and 2005.

PFC Energy expects a major depletion of foreign assets to dangerous levels to take place in those years if prices fall below $20/B WTI as is expected ... Chavez’s recent announcement that the government would be interested in developing the Tomoporo oil field follows logically from its need to expand revenues. The ability of the Venezuelan authorities to attract sufficient in-vestment will be a key challenge for the government. Attracting further foreign investment could be quite a serious challenge, given the fact that the oil sector and its workers have played a central role in attempts to overthrow Chávez, the problems already experienced by investors in the upgrading projects and the perceptions among major international companies that the upstream oil sector is quite mature in Venezuela. As a result, the government will be forced to revisit the issue of the Hydrocarbons Law. This will become an urgent necessity when prices fall next year and prospects for a political solution remain elusive”.

North America

• We are strengthening our energy co-operation with Canada and Mexico.
• Mexico has begun to allow independent power producers (IPPs) to sell power to the public grid.
• Energy consumption in Mexico is expected to grow by 25% during the next five years; IPPs could attract the required investment in new generation and transmission infrastructure.
• North American energy trade is a two-way street.
• Mexico is becoming an important source of our oil imports. At the same time, the US is a net natural gas exporter to Mexico, and our refineries supply over 15% of Mexico’s refined petroleum products.

Saudi Arabia
• And the other major Gulf producers like the UAE and Kuwait repeatedly emphasize their commitment to be reliable suppliers.
• Saudi Arabia’s own efforts in working with other major producers to offset the Venezuelan disruption is an example of its leadership role.

Competition for Investment in Post-War Iraq...
Such a view will not be complete without taking into account the now-defeated Iraq – a country that in itself will eventually present a huge investment opportunity for foreign oil firms. Furthermore, a post-war Iraq is likely to increase the competition among Mideast Gulf producers-principally Kuwait, Iran and Saudi Arabia-for upstream investment dollars (5). “Big volumes do not necessarily mean big profits”. BP chief executive John Browne warned. A US-sponsored government in Iraq may want to open reserves to foreign investment, but it will also be aware that any perception it is giving away national assets would threaten its survival. The James A. Baker III Institute, warns that “a mechanism should be developed to ensure that all proceeds and activities involving Iraq’s oil industry are transparent, public, and remain in the ownership of Iraq’s treasury” But the administration itself is only just starting to plan seriously for post-war Iraq under the unofficial leadership of US national security advisor Condoleezza Rice.

The sheer size of any oil opening will ultimately attract investors even if the contract terms are no better than those of the country’s neighbours are. The most likely form of investment will be similar to Kuwait’s operating service contract, Iran’s buy-back contracts, or even Iraq’s existing and untested “Modified buy-back” formula. Under these, companies can book reserves for a limited time, with returns on investment around 12-15 PC. The majors need to build a presence in the region as reserve bases in other areas of the world decline.
Iraq has identified projects that would bring 3-mm b/d of new oil production capacity on stream. Updating technology at already producing fields, and development of unexplored acreage in the western desert could add still more.
The scope of opportunity in Iraq is vastly bigger than in neighbouring countries. Kuwait’s plans –the most attractive regional investment opportunity so far –envisage building an extra 450.000 b/d of capacity using foreign investment.
Where private companies can hold equity in the region, they receive a guaranteed but low profit that is unconnected to the market price. Investors in Abu Dhabi, including Shell, BP, ExxonMobil and TotalFinaElf, take a fixed, fee of about $ 1 for every barrel produced,. Rates of return are also at the centre of negotiations over the Saudi gas initiative.

Jostling for Position...
Major oil companies, however, have been tight-lipped about their wishes of plans for a post-war Iraq, not wanting to fuel criticism by sectors of the public that the war is about oil. But they are all anxious not to be left out once Iraq presents real opportunities.

Company executives have privately met White House officials to discuss post-war Iraq plans. US companies would improve their position against French and Russian firms should an US-led attack oust Saddam Hussein. (6)

BP is the major with the weakest presence in the Mideast Gulf, apart from ChevronTexaco, but is has been vocal in calling for “a level playing field” in post-war Iraq.

Oil service deals will dominate efforts to get Iraq’s industry block on its feet during the months or years that it will take a post-war government to put in place major exploration and development contracts.

Iraqi service contracts could give oil companies an edge when more lucrative production-sharing or buy-back deals are eventually offered. Even though service contracts do not allow companies to book reserves and provide little upside, the could be the only short-term opportunity for firms to play a role in Iraq’s upstream.

ExxonMobil, for example, is in “pole position” to gain from regime chance in Iraq and that “with its huge political weight...ExxonMobil is likely to have a major part to play in the shifting geopolitical landscape post-11 September.” As author Martin Amis says: “The war...will not be an oil-grab so much as a natural ramification of pure power”.

The US has given little thought to the role of its companies in post-war Iraq. Without regime change, “a significant portion of the world’s supply of oil will be put at hazard”, wrote key administration hawks Donald Rumsfeld and Paul Wolfowitz to President Bill Clinton in 1998. They still believe this, and are implementing the solution. But that is different from pursuing a war for oil companies (7).

As long as the oil flows, it is of no consequence, which companies produce, it. The US majors point out that, far from helping them, Washington limits their scope through sanctions on Iran and Iraq. “As long as there are sanctions, US companies are not involved at all in Iraq.” Says ExxonMobil chief executive Lee Raymond. Post-war, he says, “I suspect we can compete as well as anyone”.

BP chief John Browne says “the most important thing for us is a level playing field” in Iraq. Shell chief Philip Watts says: “The events in the Middle East are deeply troubling. It is not just the present uncertainty but also the longer-term potential for instability and the alienation of many in the Islamic world from the West that concerns me”

The major’s fear Iraq will offer little more than oil field service contracts. The fear oil prices will fall if foreign investment in Iraq boots output to 7 MN b/d in 10 years. This would be irrational, risking confrontation with OPEC that could end in price collapse.

The war on Terror and the Next Phase...
Chairman of the Defence Policy Board, US Department of Defence, Richard Perle, was interviewed by John Holmes on 18th. February in the ABC Online Four Corners' program on the battle about where and how to prosecute the next phase of the war on terror.
Richard Perle, has been involved in US security and foreign policy for more than 30 years, and his observations throw bright lights on key aspects of US foreign policy, and especially oil policy where he clearly states that US interests are served by the maximum number of producers producing the maximum quantities of oil which can be then bought at ever-lower prices. (8)

“JONATHAN HOLMES: Is there a set of core beliefs that you've come to about United States' role in the world that's sort of held true right through that time that you could encapsulate for us
RICHARD PERLE: Yes there is and it was very much exemplified by Senator Henry Jackson, "Scoop" Jackson who was a mentor for many of us directly and for all of us indirectly and it is the belief that democracies must confront totalitarian rule when they find it.

JH: There was and is a strong kind of moralistic element to this isn't there as opposed to that very kind of pragmatic balance of power Henry Kissinger attitude, can you talk about that at all?
RP: Scoop was a realist, he understood that power has to be balanced so it was not that he was naïve about the real world of power politics, it's just that he was unwilling to abandon the issues, the core value issues.

JH: What brought you and Paul Wolfowitz together?
RP: We both turned up volunteers in 1969 to write a report on the debate over ballistic missile defence.

JP: In Paul's case, his extended family largely perished in the Holocaust, that may have been the experience of quite a number of those that are now called neo-conservatives, but do you think that had an effect on the way he looked at the United States as a democracy, the importance of conserving it?
RP: I think for many of us the rise of Nazi Germany, the appeasement that permitted Hitler to get as far as he got, the Holocaust, the terrible suffering was one of those seminal events that informed a whole generation, not just neo-conservatives. The fact that Paul had family connection to the Holocaust may well have deepened the sense that this was an immediate matter for him.

JH: All of you I think moved over to the Republican Party, beginning of the Reagan years, I'm still a Democrat, I think Paul has changed his registration. Jeanne Kirkpatrick changed hers some years ago so did Eliot Abrams and others
RP: Yes I did serve in a Republic administration. I thought the President was pretty tolerant about that. I thought Carter's foreign policy was a disaster and Reagan had to deal with, the build up of the American forces. There was a moral dimension to the Cold War and the politicians and the diplomats who had made the policy up until that moment didn't want to deal with that. I don't believe the Cold War could've been won without that moral ideological offensive. That's the single most important thing Ronald Reagan did. I think this President is much closer to Ronald Reagan than he is to his father. I do believe that he's tougher minded, I think he's got a deeper sense of these moral, ideological issues. Ronald Reagan knew far more than President Bush but President Bush has absorbed information like a sponge and I think his judgement, his ability to analyze his insight into the principal issues he has to deal with is formidable.

JH: You don't think it's true that moral fervour has been easily manipulated by those who know more?
RP: No, no I don't think so at all, I don't think he's been manipulated, I think that he is the architect of his own principal ideas as was Ronald Reagan.

JH: Probably the last time that you had a similar fervour in Europe, an anti-American fervour was when the Intermediate missiles were going in, although the governments were more supportive, what was your attitude to those demonstrators then and do you feel the same today?

RP: I was the official responsible for that in the defence department then and I lived through every minute of that. I think I travelled to Europe 96 times in the space of three or four years. so it wasn't quite as naïve as I think the current demonstrations are… The demonstrators today seem more genuine than more naïve but then as now people were responding viscerally to the prospect of war, in this case armament and in the 1980s without a deep comprehension of what was at stake.

JH: They are thinking very much about the death and destruction that would occur to the Iraqi people if there were a war?

RP: That's what they think and nobody can prove this. I think that the French now conceive of themselves as the leaders of the European Union and the formulators of the common view of the European Union whether the others like it or not and Jacques Chirac conceives of the European Union as a counter weight to the United States, which is okay, we can live with that but a counter weight is not an ally. Counterweight is opposition, it implies different objectives and certainly the balancing of your ally doesn't add to the strength of the two of you as allies so it isn't an alliance relationship and I think we need to recognize that.

JH: I mean you did have somewhere between 6 and 10 million people they reckon around the world demonstrating over the last weekend.

RP: Yes. I couldn't help but be struck by the irony because I saw the 6 million figure, that is the number of Jews who perished when well-meaning people, including peace demonstrators, failed to understand the threat that Adolf Hitler posed. It's a failure to appreciate the threat and the danger if Europe is ever again a continent that thirsts for war, God save us.

There's nothing artificial about recognizing that Saddam Hussein has weapons of mass destruction, so I make no apology for the fact that some of us were concerned about this long before September 11. Yes, he does have links with Al-Qaeda, there's no question about that. It has been documented.

JH: In 1996 you and Doug Feith and others were involved in producing a strategy paper for the Netanyahu government.
RP: It was unsolicited advice.

JH: Unsolicited. Nevertheless it did advocate a fairly radical break with the Israeli policies at that time and indeed with American policies at that time, that paper has made many people say that the hidden agenda behind the neo-conservative drive to invade Iraq is essentially an Israeli agenda, a Likud agenda.
RP: I don't know what that Likud or Israeli agenda is.

JH: Well the agenda that you suggested they should have back in 1996... an agenda for removing Saddam for reordering a large part of the Middle East in favour of Turkey and Jordan of trying to completely change the dynamic of the Middle East to make it more possible for Israel to survive?

RP: Well, nobody was talking about Israeli domination our consistent theme was to defend western democracy in the region as in the world. I mean I simply don't accept that the Arab world has to live under totalitarian rule, under dictatorial rule and I don't think most Arabs would accept that either. What's wrong with that, there's nothing hidden about that agenda.

JH: Don't you think it's strange that a group of people including officials like yourself who were senior in the United States Defence Department, presumably privy to all kinds of United States policies and secrets and so on should be giving open strategic advice to foreign governments?
RP: Well we write articles all the time but this wasn't advice to a foreign government, it was an open paper, it was published.

JH: But commissioned by Netanyahu...
RP: No.

JH: By Likud...
RP: No, no, no not at all, it had nothing to do with Likud. So you don't think there's any reason for people in the Middle East in believe that the United States can be impartial in its operation in the Middle East ... I don't think we are impartial. I don't think we should be impartial, we should have a point of view about what is in the best interests of the things that we value.

JH: Do you think that it's right though that the United States simply because it is powerful should be the arbiter of right and wrong, should be the one that decides on war and peace in the Middle East or anywhere else on its own?
RP: Well. I think we act in our own interests but we do so from a position of respect for and devotion to liberal democracy.

JH: But the United States' national security strategy right now, emphasizes its sovereign right to pre-emptive action especially against states that may be in possession of weapons of mass destruction, and hardly emphasizes or even mentions the United Nations Security Council, that entire machinery that was set up after all by the United States after Second World War as an arbiter of these things is almost ignored...

RP: Indeed the UN is about 50 per cent dictatorships so what moral authority attaches to that?

JH: On September the 12th already before there was any evidence that Iraq, whether there is evidence now or not, had anything to do with that attack, Paul Wolfowitz was already advocating that United States should strike at Iraq, your own Defence Policy Board advocated a very similar thing within days. This struck many people as pure opportunism what you and Wolfowitz were arguing immediately after September the 11th was not that the United States should attack the Al-Qaeda training camps in Afghanistan, you were advocating an attack on Iraq. It was perfectly reasonable, logical, inevitable that attention would turn to Iraq...

The fact that people like Paul Wolfowitz, people like yourself on behalf of the Defence Policy Board were advocating within days of the September 11th attack that the United States should strike back, not at Afghanistan but at Iraq has led many people to say the neo-conservatives were simply using September the 11th to further an agenda that had been there all along.
RP: No, all the rest and Iraq was on the top of that list.

JH: But it were already at the top of your list for other reasons and surely it's true that the political climate made the use of military force against Saddam by the United States possible after September 11th whereas it would not have been possible before.
RP: I think it was not possible before in the same way, just it would not have been possible to destroy the Taliban before September 11. No, the world changed on September 11, it changed for Americans fundamentally and we have to be prepared to stay long enough to see decent successful regimes, and I have no doubt we'll stay.

JH: And is it about Iraqi oil?
RP: No, no, if it were about Iraqi oil, we would lift the sanctions and say please produce more oil, we'll buy it. It may be about Iraqi oil for Jacques Chirac, but it isn't for us.

JH: It's not about the United States controlling 12% of the world's oil in a situation where it is facing some degree of energy shortage?
RP: What does it mean to control the oil? I mean the oil is produced by Iraqis, it will go on being produced by Iraqis, the difference is that it will be produced in the interests of all the people of Iraq and not just for a handful of people around Saddam Hussein, who have become enormously wealthy by stealing that oil from the Iraqi people. No, I mean our interests are served by the maximum number of producers producing the maximum quantities of oil, which we can then buy at ever-lower prices.”

Industry wants high prices rather than growth...
However, not everyone would be happy with Perle’s idea of lower-and-lower oil prices. According to the Petroleum Argus, oil is a weapon of mass disruption, and an oil shock disrupts the entire global economy: Morgan Stanley economist Stephen Roach indicates that UN sanctions against Iraq and Kuwait in 1990 brought a windfall for other OPEC members as they seized market share. Saudi Arabia hiked output from 5mn b/d in 1989 to 8mn b/d in 1991, sharply boosting its revenues. Volume growth allowed OPEC to pursue moderate price policies for much of the ‘nineties. The economic boom and rising oil demand reinforced this, at least until the Asian crisis in 1997.

There will, however, be no return to the roaring ‘nineties. After a devastating asset bubble, the world economy is in “a far more precarious state” than 12 years ago, says Roach. The spirit of the age has turned from globalization to unilateralism. This is a time of confrontation, reminiscent of the ‘seventies, when producer nations were asserting there sovereignty. Upstream nationalizations in OPEC compelled the majors to develop oil elsewhere. In 1974-84, non-OPEC output rose by nearly 50pc to 41mn b/d. (9)

The predominant industry interests want high oil prices more than growth. This coalition includes producers from OPEC to Russia, oil companies and even consumer governments, wary of dependence on the Middle East. In the past three years. Brent has averaged over $26/bl – who wants to push it down? Companies face no imperative to expand upstream as they did in the ‘seventies. Oil is not perceived as a growth business compared with, say, natural gas. It is an industry approaching its declining years. It is not the end of the oil age, but it may be the beginning of the end. If so, prices could stay high for years - they must do so, in order to spur use of alternative fuels, greater efficiency and technological change. This process of creative destruction will be the final use of oil as a weapon.


1) Petroleum Argus- 24 February 2003
“Winning the peace”
2) Mees17 March 2003. “Bush’s Middle East vision” by Philip H Gordon
the Journal of the International Institute for Strategic Studies (JIIS), vol. 45, no 1, Spring 2003, Philip H Gordon is a senior fellow in foreign policy studies at the Saban Center for Middle East Policy at the Brookings Institution in Washington DC.
3) “US overview of global energy scene”
by Alan Larson
US Under Secretary of State for Energy, Alan Larson at New York University on 4 March 2003.
4) Venezuela: “Chávez survives; now what?”
Washington DC-based PFC Energy’s market intelligence service on 24 February
5) “Post-war Iraq will up competition for investment”. 24 February 2003- Petroleum Argus
6) Weekly Petroleum Argus – “Majors jostle for position”
7) Petroleum Argus 10 March 2003
“No oil for blood”
8) ABC Online Four Corners: interview with Richard Perle. Jonathan Holmes interviews Perle, Chairman of the
Defence Policy Board, Department of Defence on 18 February, 2003.
9) Petroleum Argus- Global Markets 3 March 2003
“Shocks and surprises”

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