Oil's Influence on Development in Iraq - Essay Example

Oils influence on development in Iraq Introduction Iraq plays a vital role in the world’s economy due to the high number of its oils reserves. Apart from influencing the world’s economy, Iraq oil reserves are vital in its political development and that of other countries. Iraq’s oil reserves are ranked second after those of Saudi Arabia, which has the world’s largest oil reserves. For over three decades, Iraq’s oil policies have been remarkably essential in determining oil prices and international oil supplies. Iraq is one of the founding members of the Organization of Petroleum Exporting Countries (OPEC). In addition, Iraq is on record as the first oil producing country to nationalize part of its oil reserves in 1961. The Iraq National Oil Company has made significant contributions in the formulation of international oil policies and it is expected to contribute more if there will be political stability in Iraq (Alnasrawi 7). Iraq’s oil production is estimated to be over 2.1 million barrels per day (bpd). This production is roughly 2.5% of the total oil supplied around the world. Going back to the trend of Iraq’s oil production, statistics indicate that Iraq produced an estimate of 4 million bpd in 1979, which placed it third after Iran and Saudi Arabia. Before the Iraqis invasion of Kuwait, Iraq’s oil production averaged 3.5 million bpd. This production began to reduce in the 1990s after the Gulf war and after the introduction of international sanctions against Baghdad. By the time the US was invading Iraq in March of 2003, Iraq’s oil production averaged 2.6 million bpd (Alnasrawi 13). Challenges within Iraq’s oil sector After the US invasion, production of oil in Iraq has declined remarkably to estimates of 1.5 million bpd in 2003, 2.00 million bpd in 2004, and in 2005, oil production was 1.8 million bpd. In 2006, oil production averaged 2.06 million bpd; this was below the government’s target of 2.5 million bpd. Despite the increased global oil prices, Iraq has managed to meet its budget estimates (Gordon 1-70). It is evident that Iraq’s oil market has suffered a lot in the last three decades. Experts point out that declines in Iraq’s oil production in the last five years is due to poor management on oil reservoirs. In addition, these declines are as a result of poor maintenance of pipelines, pumping stations, and other infrastructure. A situation of political instability in Iraq may be associated to problems facing Iraq’s oil market. Since 2003, there has been remarkably less development on potential oil reserves, which implies that there is the lack of new oil reserves in Iraq. One contributing factor to this situation is not due to lack of money, but its due to politicization within the ministry of oil (Gordon 1-70). Other factors associated with the lack of developments in the oil industry include lack of trained human resource, and increased corruption within the oil sector. Presence of insecurity in key oil production zones worsens the already identified problems in the oil sector. Some of the plans that the Iraq government has in order to bring the oil sector back on track are to reorganize the oil industry and to make a portion or the entire oil industry private. These moves may have direct impacts on competition within the international oil market in the future. In addition, they will determine the relationship that will thrive between key oil producers and private oil companies. Therefore, any increase in oil production will be vital in determining standards within the international oil market (Ebel 8). Interventions Much is not clear about Iraq’s government plans to rescue its oil sector. However, local and international companies seem to be interested in investing on Iraq’s oil sector to benefit both the Iraq government and its citizens. The government has introduced a petroleum law that understands the role of the national oil company, and allows foreign investors to have their share in Iraq’s oil sector. Through this law, a petroleum council has been introduced and it is responsible for giving out licenses for oil exploration. Issuing of licenses is done in a way that maximizes revenue collection from the oil industry. In addition, the petroleum council ensures that there is a balance in issuing of license to prevent companies from dominating new oil fields (Cordesman & Davies 540). The petroleum law gives Iraq a chance to repair its oil sector if it is exercised fully. For a long time, politics in the oil sector have been a significant letdown in the development of the oil industry. Oil is the back bone of Iraq’s economy, and without a clear definition of the petroleum law, the oil sector may fail to make positive progress. The oil sector contributes to about 70% of Iraq’s GDP and over 95% of government revenues. Therefore, proper management of the oil sector is vital for the success of Iraq’s economy today and in the future (Cordesman & Davies 543). The US government gave Iraq a grant aid of $1.72 billion for the reconstruction of the oil industry. These grants were issued under the Iraq Reconstruction and Relief Fund II. However, lack of efficient coordination and oversight led to failure in establishing a strategic plan that would prioritize on projects. Initial stages of Iraq reconstruction required efforts in rehabilitation and repair of reservoirs, but politics and public diplomacy hindered these efforts. Experts point out that US grants for the development of Iraq’s oil sector have not done much in the oil industry. However, the grants have helped in the implementation of some projects (Ebel 9). Projects that have benefited from the grants include rehabilitation of gas oil separation plants, Al-Fatah Crossing project, Qarmat Ali water injection system project, and rehabilitation of the Gulf export terminal. The latter project is the only project, which has received full implementation through the grants. Increased incidences of insurgency have caused immense damage on the Al-Fatah crossing project and the Baiji gas oil separation plant. These damages have reduced oil processing for export through Turkey by over 300, 000 bpd. At some point, production at Rumaila fields declined due to delayed water injection processes as well as lack of experienced technical personnel. Concerns are high over the lack of proper strategic plan at Ramaila and experts point out that the reservoir may suffer damage and subsequent loss of production (Ebel 11). Insecurity within Iraq has posed a serious challenge on the oil sector. In 2003 and 2005, there were 282 attacks on Iraq’s oil infrastructure. In addition, increased intimidation to key oil experts has caused many oil leaders to be killed, leading to loss of essential experts within the oil industry. These problems plus Iraq’s isolation over the period of its oil exploration have reduced the ability of the Iraqi government to have proper management over its oil resources. In order to reconstruct Iraqi oil industry, availability of competent personnel is vital for management purposes and other expertise jobs. Therefore, the Iraqi government should expand its training facilities for its citizens in order to have competent experts who can manage the oil sector (Cordesman & Davies 550). The state of insecurity in Iraq hinders international oil companies from investing on Iraq’s oil sector. The international companies are on high demand in other regions, which do not face insecurity problems and this reduces the attention paid on Iraq. In the past few years, economic sanctions, war, and civil strife have hindered Iraq’s capability to increase its oil production. Out of the 74 discovered oil fields, only 15 oil fields have seen some development. The western desert region of Iraq is believed to be highly rich in oil, but has not been explored. The 74 discovered oil fields have 6 oil fields that are considered to be huge with over 5 billion barrels, while 23 oil fields are considered to be large with 500-5 billion barrels (Cordesman & Davies 553). Experts point out that with such potentials, Iraq still has a chance to regain its lost potential in oil production in order to reach levels of 3-5 million bpd in the next decade. However, massive investments need to be done in order to take Iraq back to its old days. Thus, Iraq’s oil policies and proper strategic planning within the oil sector will be particularly vital in the international oil market in the future. To date, Iraqi government has had numerous projections on its oil sector, but none of them has been achieved due to policies and state of insecurity. Creating new oil fields could perhaps increase oil production in Iraq (Ebel 22). In Iraq, oil production is mainly concentrated in Northern and Southern regions. In the Northern region, Kirkuk holds the highest oil production activities, while the Southern region has many of its activities concentrated in Basrah. However, production in Kirkuk faces a serious challenge due to oil reinjection practice. This practice causes an increase in the viscosity of oil, which makes it difficult and costly to obtain oil. It may also lead to permanent damage on the oil fields. Currently, the most essential oil field in Iraq is Rumaila, which is located in the south. Production in the south region estimates about 1.8 bpd, and Rumaila has most of the production (Alnasrawi 44). The southern region uses water injection practices for its oil production. Continued drilling and poor management of Rumaila field may reduce its potential in oil production. The measure that is currently underway in an effort to protect this field aim at reversing Coning and reintroducing pressure at the field (Alnasrawi 51). An analysis on oil refineries within Iraq indicates that there are 10 oil refineries whereby 4 are main facilities and 6 are minor facilities. Iraq has a reefing capacity of about 600, 000 bpd. During times of war in Iraq, the refineries were serious damaged, and since then, the Iraq government has not managed to restore them back to their original position. Statistics indicate that about 60 % of Iraq’s refinery plants are currently in operation (Cordesman & Davies 570). Map of Iraq showing major oil fields and pipeline networks. Source: Google maps The way forward In order for Iraq to regain its glory, which existed over three decades ago, the government must provide a secure environment, good governance, and invest heavily on its infrastructure. Of most importance is to end the insurgency within Iraqi territory. The other issue to put into consideration is to educate Iraqis on the role of international investors in the oil sector. This is crucial because Iraqis identify with oil as a sign of national identity, and have the perception that the mission of foreigners is to steal their oil. This makes them respond negatively to the idea that some part of their oil should be managed by foreigners (Alnasrawi 72). Diversity in investing is another thing that can save the economy of Iraq and make it a leading world economic giant. This can be achieved through investing on education to produce competent human resources who can efficiently manage the oil resources. Lack of diversity in investments brings corruption, unbalanced distribution of wealth, abuse of human rights, creates a disgruntled population, authoritarianism, and growing radicalization. These factors give a clear description of Iraq, hence the poor development despite its immense richness in oil resources (Cordesman & Davies 577). Works cited Alnasrawi, Abbas. The Economy of Iraq: Oil, Wars, Destruction of Development and Prospects, 1950-2010. Santa Barbara: ABC-CLIO, 2004. Print. Cordesman, Anthony & Davies, Emma. Iraqs Insurgency and the Road to Civil Conflict. Westport: Greenwood Publishing Group, 2008. Print. Ebel, Robert. Geopolitics and Energy in Iraq: Where Politics Rules. New York: CSIS, 2010. Print. Gordon, Joy. Invisible War: The United States and the Iraq Sanctions. New York: Harvard University Press, 2010. Print. Read More