It appears almost inevitable that Saddam
Hussein will be out of power within a relatively short span of
time, and U.S.-led coalition forces will be temporarily
administering Baghdad in the near future.
This has
caused concern to many in Russia, who feel that coalition
control of Iraq — which sits on the world’s second-largest
known reserves of petroleum, outrivaled only by Saudi Arabia —
will be used to dramatically lower the price of oil.
It has been estimated that Russia’s treasury loses $2
billion for every $1 drop in the price of oil on international
markets. A sudden drop would have serious negative
consequences for the economy.
Much as many Americans
view cheap oil as a panacea for their economy, many Russians
find the prospect baleful indeed. A number of politicians hold
the view that the war against Iraq is really motivated, at
least in part, by an American desire to strike a blow to
Russia’s economy. Worries also circulate that Russia’s oil
titans will lose their contracts in Iraq to foreign
competitors.
Luckily for Russia, these fears are
probably unfounded, at least in the short term. The fact of
the matter is that Iraq’s 120 billion barrels of proven
reserves are useless unless they can be effectively extracted
and transported. And it is unlikely that Iraq will be able to
challenge Russia as an oil producer and exporter for some
time.
Iraq had its oil infrastructure devastated in
the first Gulf war. It was further degraded during the years
of grueling sanctions, and Saddam’s tactic of torching oil
wells compounds the situations.
The Iraqi oil-export
system cannot just be turned on with the flick of a switch.
For Iraq to become a serious oil exporter again, it needs
massive investment and work, and this is not the sort of thing
that can be done overnight. Even if damage to the country’s
oil and other infrastructures turns out to be minimal, it will
take years and billions of dollars to get Iraqi crude really
flowing again.
As things stand today, Iraq produces
only 2 million barrels a day, as compared to Russia’s 8
billion, while Russian exports are almost double Iraq’s.
Taking into account not only the need for reconstruction of
infrastructure, but also the time necessary for a post-Saddam
regime to consolidate and stabilize a fractious population, it
may be as long as a decade before Iraq can match Russia’s
level of oil production. The Iraqi oil pill is not going to
save the West’s economy any time soon, but should go down
easily with Russia.
Moreover, cheap Iraqi oil will not
hit Russia first. Instead, its initial impact will be on
high-cost production areas like Alaska and the North Sea.
At the same time, Russia’s oil majors have become
increasingly attractive for investment, both domestic and
foreign.
We’ve seen this indicated strikingly in the
recent past. The British Petroleum-Tyumen Oil Co. deal, for
example, speaks volumes about the interest with which foreign
energy companies are eyeing Russia’s reserves and the
companies that can help get at them.
Exxon Mobil Corp.
is also trying to work more closely with its Russian
counterparts. Yukos CEO Mikhail Khodorkovsky’s decision to go
transparent, in retrospect, and the resulting increase in the
company’s share value look to have been prophetic for Russia’s
oil industry as a whole.
In short, Russia has little
to fear from a U.S.-U.K-held Iraqi oil card.
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