In the National Interest, March 5, 2003

War in Iraq: Not a "War for Oil"

Charles A. Kohlhaas

Nothing demonstrates the political and moral bankruptcy of the American liberal
left more clearly than the current attempt to portray military action against Iraq
as "for the oil". At first this seemed to be only a claim by the usual suspects that
quickly moved onto certain editorial pages. But it entered the Presidential
campaign with Congressman Dennis Kucinich' s preposterous claim on "Meet the
Press" that Iraq contains five trillion dollars' worth of oil, syllogistically followed
by the allegation that such an amount of oil is the obvious reason for an invasion.
The allegation was countered on the program forcefully by Richard Perle, but we
can expect to hear it again. Not only is the allegation base, but the logic is flawed
and the numbers are wrong.
How Congressman Kucinich could come up with 5 trillion dollars for the value of
oil in Iraq is a mystery. The flagrant misrepresentation in this assertion seems to
be an attempt to trivialize an invasion as motivated by a business decision on
behalf of one of the left's favorite scapegoats - the oil business. Such a
characterization fails on the basis of being an extremely bad business decision.
All wars are fought for economic reasons if staying alive and not being enslaved
are included as economic benefits even though difficult to quantify in dollars and
cents. An invasion "for the oil", however, implies an objective which is tangible,
quantifiable and has a price posted on a daily basis. A war "for the oil" thus can
be
subjected
to
a
cost-benefit
analysis.
Iraq produces a bit more than 2 million barrels of oil per day (bopd) now. This
production rate fluctuates in a range of about 0.5 million bopd depending on the
mood of Saddam, how he wishes to impact the oil price and various actions of the
UN. The actual amount can only be estimated because the amount of smuggled
oil is not known accurately. Although Iraq is a member of OPEC, its production
rate is allocated by the UN and is not part of the OPEC quota system.
The most common concern regarding the possible effect of an invasion on oil
production is that oil operations will be disrupted during military action.

Disruption probably will reduce world supplies and drive oil prices up on the
world markets for a short-term. A less probable, but nevertheless real, concern is
that Saddam will sabotage or contaminate the fields and cause supply disruptions
and higher prices for a medium to long-term. So the most likely outcome of an
Iraqi invasion is a reduction of supplies and increased prices; clearly an
additional cost attributable to an invasion, not a benefit, and exactly contrary to a
claim that the invasion is "for the oil".
If we consider a post-invasion situation in which the disruptions and price effects
of the invasion have passed and damage to the fields has somehow been
prevented, Iraq would again be producing at about its current rate. It produces at
that rate now. Where is the gain?
Estimates of the costs to the government of the United States for an invasion of
Iraq seem to be mostly between $50 billion to $200 billion. If we invade Iraq for
oil, the U.S. government must be able to derive a benefit from the oil greater than
this cost. What is not clear is how Washington would be paid back for the war.
Governments can charge taxes and fees. The United States will not be intending
to occupy Iraq, but to establish a new government. The new government will be
expected to honor international commitments and contracts, particularly debt
repayment. Iraq owes Russia about $8 billion. The United States has no taxing
or fee-charging authority in Iraq. If the United States did, by brute force, impose
a tax on Iraqi crude, it could not be an add-on to the market price at which crude
is sold in the international market or no one would buy it. If that crude is taxed
on the net to Iraq, it must be a fee taken from the Iraqi government share and
could not be more than about $3 per barrel without imposing an intolerable
burden on a country which the United States will be trying to stabilize
economically and politically. The United States government currently pays about
4 percent for long-term (10-year) money; that corresponds to $4 billion per year
for a 100-billion-dollar war. A $3-per-barrel tax will bring in about $2.4 billion
per year; not enough even to pay the interest on the cost of the war.
But suppose American companies are given the contracts to operate the fields.
The United States government can still only recoup cost by taxing the oil, or
income thereon, produced by the U.S. companies. Russian and French
companies have interests which would be honored for diplomatic reasons. A
reasonable limit of about $3 per barrel still applies and in this case it would not
be on all the oil but only on the part which American companies produce so the
gain would be even less than in the case cited above.
Investment required to find and develop oil supplies is generally in the range of
$10,000 to $15,000 per daily barrel of production in the United States and
$5000 to $12,000 internationally. Some production can be developed in Saudi

Arabia for as low as $3000, but foreign companies are not allowed to operate in
Saudi Arabia. For a total investment probably between $10 billion and $20
billion, supplies can be developed elsewhere to replace the 2 million bopd of Iraqi
production; much cheaper than the cost of an invasion and without the risks and
unpleasant aspects of military action.
Could we increase production in Iraq after an invasion? Yes, but that increase
would also require investment just as it would anywhere. We can make that
investment in Iraq if the opportunity is available or elsewhere if it is not. But in
Iraq any investment for oil would be increased by the large sunk cost of the war.
That cost is not justified by the amount of oil production. Nothing is changed by
an invasion and the cost of the war is still a large cost without any return based
on oil.
From a political and diplomatic standpoint, the United States will probably not
be able to impose any taxes or fees on the production nor take any competitive
advantage for American companies. As noted above, immediate objectives will be
to encourage formation of a stable government and political system. Control and
administration of the oil industry will probably remain in the hands of Iraqis.
First priority will be to rehabilitate the existing wells, fields, facilities, and
infrastructure that are quite dilapidated after years of isolation from modern
technology, services, and materials. Except for the costs of this rehabilitation, oil
income will probably be used for general governmental purposes to rebuild the
country and its infrastructure and services. Therefore, any expansion into
development of new fields will probably require foreign capital and a significant
increase of activity by foreign companies. Privatization of the fields is not a
practical possibility, so foreign investment and activity will be in the form of
contracts for which the operating, fiscal, procurement, labor, liability, insurance,
accounting, legal and regulatory terms must be established. Such a process is
subject to lengthy political and bureaucratic delays.
So not only can the United States not receive any direct payback of the cost of the
war from the oil, but any significant increase of Iraqi supplies will probably not
be realized for a few, or possibly several, years.
As a business decision, invading Iraq "for the oil" is a loser, a big loser. Anyone
who would propose, in a corporate boardroom, invading Iraq for the oil would
probably find his career rather short. No, the slogan "no war for oil" is a blatant
misrepresentation propagated for political reasons.

Charles A. Kohlhaas is a former Professor of Petroleum Engineering at the

Colorado School of Mines and has worked for, founded, managed, and
consulted for major and independent companies in the international oil and gas
industry.

THE DAILY TELEGRAPH(LONDON)

October 22, 2002, Tuesday
Myth II: America wants war with Saddam because of oil
Does George W. Bush have ulterior motives for threatening Iraq with invasion and
regime change? In the second of a special five-part series, the president's former
speechwriter David Frum examines the importance of oil
BYLINE: By DAVID FRUM
SECTION: Pg. 25
LENGTH: 1656 words
For a visitor from across the Atlantic, the most immediately startling thing about British
political and media life is this: everybody knows each other.
I was an editor at the Wall Street Journal, America's most important conservative paper,
for three years in the late 1980s and early 1990s. I can count on two hands the number of
times I met a politician in an informal setting - that is, something other than an editorial
board meeting or an interview.
You can blame distance for some of this sense of remoteness: New York is 225 miles
from Washington, only slightly less far than the distance from London to Newcastle.
But even inside Washington, it is very unusual for politicians and journalists to know
each other as well as their London counterparts seem to do. The Georgetown dinner party
you read about in the novels of the 1950s and 1960s is dead and gone. At 8pm on a
weekday evening, Senator Foghorn is much more likely to be drinking sparkling water at
a 50-person fund-raiser with the American Smelting Association than to be exchanging
wisecracks with a syndicated columnist across a mahogany dinner table.

Compared to the fragmentation of American political, media, and intellectual life, there is
something wonderfully seductive about London's intimacy and conviviality.
But if the fragmentation of American political life has many bad effects, it has one good
one: it helps to reduce the spread of cliches. A plausible delusion can sweep through
London like the Dutch blight through a close-packed forest of elms - and one such
delusion is that the West's war in the Middle East is a "war for oil".

One Labour MP, Alan Simpson, phrased the accusation pungently in the Commons
during the debate after Tony Blair presented the Government's dossier against Iraq.
Saddam Hussein's "real crime", Mr Simpson said, "is his threat to negotiate oil contracts
with Russia and France, not America". President George W. Bush was like a drunk "who
needs to satisfy his thirst for power and oil", and it was Mr Blair's duty "not to pass the
bottle".
For a visitor from Washington, this was all a bit dizzying, for three reasons.
1) Wasn't it just yesterday that America was being scolded for not buying oil from Iraq
and thereby causing (as it was wrongly but loudly alleged) the deaths of hundreds of
thousands of Iraqi civilians?
2) Isn't it odd for people who oppose "wars for oil" to rally to the defence of a dictator
who launched two of them - one to conquer the oil fields of Iran, the second to annex
neighbouring Kuwait?
3) Although it is apparently wrong for hawks to be swayed by oil, it seems to be perfectly
OK for doves. Here, for example, is a leader from the anti-war Guardian: "Would
Saddam launch missiles against Kuwaiti and Saudi oil fields? Would an attack on
Baghdad foment strife in Riyadh? To different degrees, both would be a shock to oil
supplies . . . [During the Iranian revolution,] Iranian oil production fell from six million
barrels a day to three million and never recovered. If the same happened in Saudi Arabia,
the world would see oil prices spurt upwards. The consequences would be rising inflation
and consumers deprived of spending power." So, while war for oil is condemned,
appeasement for oil is quite all right.
Oil is important. America imports half its oil, and its friends and allies import much more.
Although America's own imports mostly come from secure sources in the Western
hemisphere and Africa, the shock to the world economy from a crisis in the Middle East
would not spare it. And so, ever since 1973, the security of Middle Eastern oil has
become one of the top priorities of American foreign policy - as it is for most of
America's European allies.
But here is where the no-war-for-oil crowd make their mistake. Those Americans who
worry most about oil tend to oppose action against Saddam, because they worry about the
effects an Iraq war would have on Saudi Arabia. Take, for example, former Georgia
Senator Wyche Fowler, President Clinton's ambassador to Saudi Arabia. Last November,
Mr Fowler resigned his post and returned to America to slam President Bush's Iraq
policy.
A war with Iraq "would open wounds in the Arab world that we don't want to deal with",
he said. Saddam's "neighbours can't stand him, but they don't understand why we won't
leave him alone. They're also fearful of the break-up of the country into feuding ethnic
groups if and when Saddam is ousted."

The real danger to the Middle East, Fowler added, was undue pressure on Arab states to
democratise. "All of us Western democrats believe that the finest expressions of the
human mind and spirit happen under democratic governance, but that's not the experience
of most of the world."
In the Arab world, the human mind and spirit was best expressed under theocracy. "To
have a civil government whose highest priority isn't serving God is beyond their
comprehension." That incomprehension causes the Saudis to despise American liberty.
But not to worry: despite their contempt for US principles, Saudi Arabia is a "solid ally"
and "uniquely pro-American".
And America's highest priority in the region, he concluded, should be to mollify Arab
opinion by pressuring Israel to make renewed concessions to the Palestinians.
Fowler's is the authentic voice of the oil lobby, the people who ran America's Middle East
policy more or less unchallenged until September 11: pro-Palestinian statehood, sceptical
of Arab democracy and concerned above all with the "stability" of the Middle East meaning the preservation of the Saudi royal family.
Many of these people supported Bush in 2000, but they are found in both parties and
throughout the American government. Listen to the retired officials and distinguished
public servants who have criticised President Bush's Iraq policy - the Brent Scowcrofts
and the James Bakers, the Anthony Zinnis and the Laurence Eagleburgers - and you will
hear that word "stability" over and over again. "Stability" means oil.
The remarkable thing about America's post-September 11 Middle Eastern policy is that,
for the first time in a generation, oil has been bumped to second place in the country's
concerns.
Think for a minute about the logic of the claim that America wants to fight for oil. Does
that mean "for access to oil"? America can already freely purchase all the oil it wants.
There has not been a credible threat to access to oil supplies since the Arab embargo of
1973-74 and there is no credible threat to access today. Saddam wants to sell more oil,
not less. And if conquest and occupation were necessary to obtain oil, why wouldn't
America attack an easier target than Iraq - Angola, for example?
So does "for oil" mean "for cheaper oil"? Is it suggested that America will invade Iraq,
occupy its oilfields, and then sell oil for, say, $12-$15 a barrel, rather than the $25-$30
barrel it fetches today?
Even though a $12-$15 price would close down the larger part of America's domestic
production and drive the country's dependence on oil imports up from 50 per cent toward
the two thirds or three quarters mark?
Even though America winked when its close allies Mexico, Norway, and Oman cooperated with Opec in 1998-99 to drive the price of oil back up from $10 to $30? Even

though Mr Bush's own father publicly worried in 1986 about the dangers of an
excessively low oil price - at a time when oil prices adjusted for inflation were only
slightly lower than today?
If Alan Simpson is right, fighting "for oil" means "for oil contracts". Last year, for
example, Saddam offered Russian companies multi-year contracts that supposedly
totalled $40 billion. Perhaps America covets those deals? But why would any government
- and especially one as cynical as Mr Simpson believes America's to be - fight a war
widely expected to cost $100 billion to gain contracts worth $40 billion?
And does Mr Simpson understand how small a sum $40 billion really is compared to the
US economy? It is, for example, only a little more than half the gross state product of
Arkansas. Does he really imagine that any president, no matter how inebriated, would
risk the lives of American soldiers - and his own political future - for that?
OK then: perhaps fighting "for oil" means "for an oil market unmenaced by Saddam", or
"for an oil market in which suppliers do not use their wealth to acquire weapons of mass
destruction"? That would be true. But that is not a fight "for oil" - it is a fight against a
dictator who wants to use oil wealth to threaten the peace of the world and the safety of
America and its allies. If Saddam were spending his oil wealth on palaces and roads,
America would not worry about him. It is the use he is making of his oil that worries
Americans - and should worry the world.
Those who mistrust America's good faith in the Middle East can accurately point to the
country's long willingness to tolerate local despots, so long as they kept quiet and kept
pumping. Shah Reza Pahlavi of Iran was by no means the worst, although he was bad
enough. Perhaps America was wrong then; perhaps it was making the best of a difficult
situation not originally of its own making.
Either way, the despots of today are much more dangerous than those of 30 years ago.
Who seriously believes that Saddam and the mullahs of Iran will keep quiet and keep
pumping once they have the nuclear weapons they seek? Surely not even the editorial
executives of the Guardian could convince themselves of that.
It is the weapons and ambitions of the regimes and terror groups which make up the axis
of evil that fuel American policy in the Middle East today. Not the price of petrol.
David Frum was President Bush's speechwriter in the first year of his administration. He
is now a resident fellow at the American Enterprise Institute and is writing a book about
the Bush presidency.