Oil, Sanctions, Debt and the Future.

LOOKING AT THE WORLD MAP of oil we find certain facts to have shaped the history of Iraq and its regional context and will continue to do so for a long time to come. At the end of 1999 world oil reserves amounted to 1033 billion barrels of oil with two thirds of these reserves to be found in five countries (Saudi Arabia, Iraq, Iran, Kuwait and the United Arab Emirates). Similarly in that year these countries were responsible for nearly one third of the world oil production of 72 million barrels per day (MBD) and over 40 percent of the world's oil exports of 41 MBD. In relation to the Organization of Petroleum Exporting Countries (OPEC) these countries command more than four fifths of the organization's reserves and two thirds of its output and exports. Therefore, what happens to the oil industry in any one of these countries will affect the fortunes of its neighboring countries. Moreover, the high degree of concentration of oil reserves, output and exports in these five countries made them a constant target o f outside power machination and interference. And it is a well-known fact that the oil sectors in these five countries have been until recently been under the direct control of a handful of multinational oil corporations (BP, Exxon, Shell, Texaco, Gulf, etc.).

This essay will attempt to deal with six topics: (1) historical background; (2) oil and the Iraqi economy; (3) the Iraq-Iran war; (4) the invasion of Kuwait; (5) the United Nations sanctions regime; and (6) Iraq's foreign debt. I will conclude with some speculative thoughts on the future of the Iraqi economy.

HISTORICAL BACKGROUND

It is a historical fact that the home governments of multinational oil corporations (US, UK, France) have all played significant roles in enabling their companies to acquire oil concessions, to penetrate markets and to deal with the governments of oil producing countries. Depending on the situation and the historical context, these governments have at times cooperated with each other and at times opposed one another. In the case of the United States evidence of the close relationship between the U.S.-based oil Multi-National Corporations (MNCs) and the U.S. government is abundant and goes way back to the early part of the last century. Few examples will illustrate the point.

During World War II and because of the war conditions oil companies could not produce enough oil to provide the funds promised the Saudi government. Instead, these companies were able to persuade the Roosevelt administration to provide such funds in order to not jeopardize the oil concession. The American President solved the problem in 1943 by stating to the administrator of the Lend-Lease program that: "in order to enable you to arrange Lend-Lease aid to the government of Saudi Arabia, I hereby find that the defense of Saudi Arabia is vital to the defense of the United States." (1)

Following World War II Secretary of State Dean Acheson instructed the Economic Cooperation Administration or the Marshal Plan "in every petroleum transaction an American company must be involved" and "deliveries [of oil] from sources other than the United States and possessions will be eligible only if made by American owned and operated companies." (2)

The policy of insisting that American companies be the ones to sell oil to Europe was most conducive to MNC's plans to expand oil output in the Middle East for their operations in Europe. Again following the nationalization of BP operations in Iran the State Department, in cooperation with the British government (following the 1953 overthrow of Iranian Prime Minister Dr. Mohammed Mossadegh), was instrumental in finding the solution which introduced American companies to Iran's oil and reintroduced that oil to the world market.

In 1958, when the monarchy in Iraq was overthrown, the U.S. government gave strong consideration to military intervention to undo the revolution. The intervention could not be justified as long as the new government respected Western oil interests, which it did. This near intervention led one observer to note that gunboat diplomacy was clearly in line with the State Department commitment to pipelines and profits.

In the early 1970s the U.S. government provided legal dispensation to oil companies in order to enable them to enter into collective negotiations with OPEC over prices. One does not have to review the whole record to establish the interest in and the commitment of the U.S. government to oil issues. This relationship was assessed by the U.S. Senate Subcommittee on Multinational Corporations of the Senate Committee on Foreign Relations in a 1975 study in which it said that the oil companies administered the system of allocating output between oil producing countries with the assistance of the U.S. government. The system was premised on two basic assumptions: (1) that the companies were instruments of U.S. foreign policy; and (2) that the interests of the companies were basically identical with the U.S. national interests. The U.S. foreign policy objectives were identified to be: (1) that the United States provide a steady supply of oil to Europe and Japan at reasonable prices for economic recovery and sustained economic growth; (2) that stable governments be maintained in pro-Western oil producing countries; and (3) that American-based firms be a dominant force in the world oil trade. (3)

Again in the 1970s, the 1980s and the 1990s, working through Saudi Arabia, the U.S. government ensured that OPEC oil supplies were at such levels as to keep prices from either skyrocketing or collapsing. Thus, in its study, The Changing Structure of the International Oil Market, the General Accounting Office of the United States Congress described the policy coordination between the two governments in these terms: "To achieve the U.S. objective of access to adequate supplies at "reasonable prices," the United States uses its bilateral relationships with friendly producers in an attempt to influence their pricing and production decision. This is especially apparent with Saudi Arabia with which...the United States has a "very active" bilateral policy. Frequent visits by cabinet-level officials including the Secretaries of State, Treasury, Defense, and Energy during the past several years illustrate this bilateralism." (4) And in the 1990s the U.S. government and its allies went to war in order to keep oil from falling into unfriendly hands.

THE ROLE OF OIL IN THE IRAQI ECONOMY

Statistically, one way to measure the relative importance of oil in the Iraqi economy is to trace the behavior of oil revenue: In 1960 Iraq's income from oil, which amounted to $266 million, rose to $521 million in 1970. But the extraordinary developments of the 1970s such as the OPEC-led phenomenal rise in oil prices, nationalization of the oil sector, the Iranian revolution and the continued rise in exports pushed Iraq's oil income from $1 billion in 1971 to $26.1 billion in 1980. With such rise in income there was an associated increase in the relative importance of the oil sector from a mere 3 percent in 1950 to 56 percent in 1980. This meant that Iraq's dependence on oil became irreversible.

But what does it mean to be an oil-based or an oil dependent economy? It means among other things the following:

a. Economic activity, employment and income are determined by the amount of oil revenue the economy receives from selling its oil abroad. In other words people's livelihood and economic security has become highly dependent on what happened to the world oil market.

b. Oil revenue became the foundation of the state in that oil income, which flows into state coffers, has become its primary source of revenue instead of tax revenue. The state now can use its newly found source of income and power as it pleased: to build its armed forces and security organizations, to provide social services, to expand the civil service, to distribute funds to its favorite groups and regions of the country and to wage wars.

c. Oil also became the main source of funds for investment in industry, agriculture, health and education and the nation's infrastructure.

d. Oil revenue enabled the state to break its financial dependence on its citizens. In other words the state no longer needed its citizens to collect taxes to finance its activities.

It is worth pointing out that the 1970s was Iraq's prosperous decade. The spectacular rise in oil revenue made it possible for all economic and social indicators to rise at very impressive rates. That performance was never to be duplicated again. The decade of the 1970s also witnessed the growth of Iraq's oil industry in all its components, as funds were available for investment. This investment was never to be duplicated in the next two decades because of the Iraq-Iran war and the UN-imposed sanctions following the Iraqi invasion of Kuwait. But as we know an oil dependent country has no control over its oil income since such income is determined by how much you can sell and at what price-factors that are determined by forces in the international political economy which are beyond the control of any one oil exporting country. This was very clearly the case when Iraq's oil income collapsed first in the context of the Iraq-Iran war and then in the context of the U.N. sanctions regime.

In the 1980s several market factors such as the stagnant conditions of the world economy, the success of energy conservation measures and the emergence of new oil exporting regions had a depressing effect on OPEC's and Iraq's oil fortunes. The problem for Iraq was compounded by the devastation of the Iraq-Iran war, which resulted in a sharp decline in the contribution of the oil sector from 56 percent in 1980 to 23 percent in 1989. And for the first years of the I990s this contribution declined to some 4-5 percent as Iraq ceased to be an oil exporting country.

OIL AND THE IRAQ-IRAN WAR

When the government of Iraq decided to launch the war against Iran in September 1980 the Iraqi economy was on the threshold of another decade of economic growth. The immense increase in oil revenue mentioned earlier had made it possible for the government to simultaneously increase spending on the infrastructure, the bureaucracy, goods producing sectors, social services, foreign assistance, imports, and the military. In addition it was in a position to have balance of payments surplus and thus accumulate unprecedented levels of foreign reserves. But the war-caused destruction and the closure of oil facilities led oil output, export and revenue to decline very sharply -- by 60 percent between 1980 and 1981.

In a country that has grown dependent on a single export these external shocks forced the economy to have to cope with a number of serious problems some of which had become structural. Among such problems are the following: 1) Iraq's major oil exporting capacity was either destroyed, blocked or closed; 2) Iraq's heavy industries were destroyed or in need of major repair; 3) the infrastructure was extensively damaged; 4) a major segment of the labor force (one fifth) was in the armed forces; 5) agricultural and industrial growth was either stagnant or negative; 6) rural workers had either been drafted into the army or drifted to the city; 7) the large number of foreign workers imported during the war had become a burden on the economy; 8) dependence on food imports increased; 9) inflation had become a structural problem; 10) privatization was not succeeding according to expectation; 11) Iraq had become a major debtor country; 12) levels of imports declined; 13) development spending virtually ceased; and 14) th e higher living standards which were promised during the war could not be delivered in the postwar period.

In short, the government's big gamble of winning a quick victory over Iran led the economy to a dead end with no prospect for recovery. What staved off total economic collapse was the pumping of finds and credit by the Gulf states, OECD and the former Soviet Union. (6)

MILITARIZATION OF THE ECONOMY

One of the most significant changes to take place in the Iraqi economy in the decades of the 1970s and the 1980s was the massive shift of labor from the civilian economy to the military and the sharp increase in military spending and military imports. In 1975 Iraq had 3 per cent of its labor force in the armed forces. By the time the war with Iran ended in 1988 the government was employing more than 21 per cent of the labor force or 1 million persons in the armed forces.

The other side of this expansion in the armed forces was the sharp rise of the military's claims on Iraq's fiscal resources. Thus, in 1970 the government spent less than $1 billion on the military, or 19 percent of the GDP-a high ratio by world standards. By 1980, the government raised military spending to $12.1 billion, or nearly 23 percent of GDP. The share of military spending, which amounted to $111 billion during the period 1981-88 was 40 percent of that period's GDP.

Another way of looking at the burden of military spending is to relate it to Iraq's oil revenue. During the eight-year period 1981-88, military spending, which amounted to $111 billion, was 154 percent of the same period's oil revenue of $72 billion. According to the Iraqi president the country imported and used $102 billion of foreign military equipment during the Iraq-Iran war. This bankrupting effect of the war explains why Iraq had to exhaust its international reserves, increase its foreign debt and suppliers' credit, resort to internal borrowing, accept grants from Gulf states, abandon its development plans, and reduce imports and social services.

OIL AND THE INVASION OF KUWAIT

Iraq entered the post war period with a smaller and disorganized economy that was overburdened with unemployment, inflation and foreign debt. To cope with the economic crisis, and to also fund an ambitious program of military industrialization the government had to rely on a shrinking source of oil revenue, which in 1988 generated only $11 billion compared to $26 billion in 1980.

The exhausted state of the economy was made worse by the 9 percent decline in GDP in 1989 over 1988 -- a decline that constituted a severe blow to the government and forced it to adopt an austerity program of spending. But to reduce government spending in a period of severe economic crisis had the effect of worsening the crisis. What the economy needed at that particular juncture was an increase in the supply of goods to dampen inflation and restore some of the living standards that were severely eroded during the war. In order to achieve these objectives the government had only one option -- to raise oil revenue. And it was in this particular arena that the stage was set for Iraq's conflict with Kuwait.

The collapse of the price of crude oil in the mid 1980s persuaded OPEC member countries to agree in October 1986 to return to their system of quotas and to set the price at $18 per barrel, a price that they deemed to be necessary for their economic and social development. Yet several countries, especially Kuwait and the United Arab Emirates, chose not to comply with their quotas thus forcing the price to decline to $12 per barrel by October 1988. Although market conditions improved, causing the price to reach $20 per barrel in January 1990 Kuwait and other non-complying OPEC countries, however, decided to raise their output to such level that the price declined by one-third by June 1990--a decline that wiped out a major portion of the oil income of Iraq and other OPEC countries. In the case of Iraq a decline in the price of $6 per barrel meant a loss of $6 billion in oil revenue per year, a loss that Iraq could not afford. The Iraqi president characterized oil actions leading to above quota production and low er prices as causing damage to the Iraqi economy that was similar to the economic damage inflicted by conventional wars. (6)

In addition to the issue of oil production and prices Iraq accused Kuwait of using diagonal drilling to pump oil from that part of the Rumaila oil field that was located inside Iraqi territory. On 17 July 1990 the Iraqi president accused rulers of the Gulf states of being tools in an international campaign to halt Iraq's scientific and technological progress and to impoverish its people. On 27 July 1990 and in the shadow of Iraqi troop movements along the Iraqi-Kuwait border, OPEC decided to raise the reference price of oil from $18 to $21 per barrel and adopt new quotas. But on 2 August 1990 the government of Iraq decided to invade and occupy Kuwait.

The invasion of Kuwait was looked at as a short cut solution to Iraq's economic crisis and to the regime's failure to improve living standards. This policy decision was articulated by the deputy prime minister for the economy who stated that Iraq will be able to pay its debt in less than five years; that the "new Iraq" would have a much higher oil production quota; that its income from oil would rise to $38 billion; and that it would be able to vastly increase spending on development projects and imports. (7)

The invasion of Kuwait prompted the United Nations Security Council, under the leadership of the United States to vote on 6 August 1990 to adopt UNSC Resolution 661, which imposed a sweeping and comprehensive system of sanctions on Iraq, which is still in effect.

OIL AND THE U.N. SANCTIONS REGIME

The centerpiece of the 1990 sanctions system was UNSC Resolution 661. This resolution and subsequent sanctions resolutions created a set of conditions, which virtually cut off Iraq from the world economy. The sanctions regime included a ban on all imports and was enforced by a naval and air blockade, an oil embargo, a freezing of Iraqi government financial assets abroad, an arms embargo, suspension of international flights, and a prohibition on financial transactions with Iraq. The UNSC also called upon member states to enforce naval and air blockades against Iraq. All shipping on the Shatt al-Arab waterway in the south of Iraq was intercepted and all vessels approaching the Jordanian port of Aqaba were boarded and inspected. (8) In short, the embargo was intended to prevent anything from getting through into Iraq. The embargo appeared to support the contention that the UNSC was using famine and starvation as potential weapons to force Iraq into submission. (9)

Given Iraq's utter dependence on oil exports and commodity imports it was not surprising that the embargo succeeded in shutting off 90 percent of Iraq's imports and 97 percent of its exports and produced serious disruptions to the economy and hardships to the people. Needless to say that these disruptions were aggravated and magnified in the aftermath of the bombing of Iraq's infrastructure. The vast scale of destruction, which must have set the economy back to nineteenth century status, should not be surprising in light of the fact that the initial plan of bombing which had focused on 84 targets was expanded in the course of the war to include 723 targets. (10)

Between the August 1990 imposition of the U.N. sanctions and the December 1996 resumption of oil sales the Iraqi people endured conditions of poverty, disease, economic underdevelopment, social disintegration, and levels of emigration, unemployment, and school dropout rates described by some as genocidal; conditions that have been maintained to this day.

What about oil under the conditions of sanctions? Oil became the focus of attention of both the government of Iraq and the United Nations for different considerations. For Iraq, oil is the foundation of the country's economy and livelihood as well as the state's basis for survival, power and rule. For the United Nations Iraq's oil was an instrument to be used to enforce its decisions and implement its resolutions from border demarcation to making payments to war victims, as well as disarming Iraq of weapons of mass destruction and monitoring future developments in Iraq. In other words by regulating Iraq's oil sales and Iraq's commodity imports the United Nations sought to control the government's room to maneuver. This was the posture which the U.N. took from the time Security Council resolution 687 -- the cease-fire resolution -- was passed in April 1991.

Oil has played a central role in all that has taken place between the United Nations and the government of Iraq since the imposition of sanctions. To begin with, resolution 687 empowered the Sanctions Committee to approve the financial transactions necessary to provide adequate funding for the importation of humanitarian supplies into Iraq. The government's repeated requests to the Committee that it be allowed to sell oil independent of U.N. controls and to import such supplies were denied. It is important to note that prior to its adoption of resolution 687, the UNSC had at its disposal two documents regarding conditions in Iraq. The first was the 20 March 1991 report of the Ahtissari mission which stated:

I, together with all my colleagues, am convinced that there needs to be a major mobilization and movement of resources to deal with aspects of this deep crisis in the field of agriculture and food, water, sanitation and health.... It is unmistakable that the Iraqi people may soon face a further imminent catastrophe, which could include epidemic and famine, if massive life-supporting needs are not rapidly met.... Time is short. (11)

The other document was the 22 March Sanction Committee determination which stated:

In the light of the new information available to it, the Committee has decided to make, with immediate effect, a general determination that humanitarian circumstances apply with respect to the entire civilian population of Iraq in all parts of Iraq's national territory. (12)

But since Iraq's foreign held assets were frozen and its oil exports were embargoed the Sanctions Committee's determination proved to be of no benefit to the population.

Then there was the mission led by the Executive Delegate of the U.N. Secretary-General, which submitted its 15 July 1991 report on humanitarian needs in Iraq. The new mission concentrated its work on four sectors: food supply, water and sanitation systems, the oil sector, and power generation. This mission estimated that the cost of rehabilitating these four sectors would be $22.1 billion. (13)

The mission also offered a one year estimate of the costs based on scaled down goals rather than pre-war standards and came up with the figure of $6.8 billion for food imports; power generation; the oil sector; health services; water and sanitation; and essential agricultural inputs. Aside from the humanitarian merits of the case the mission advanced two other arguments.

First, the amount of funds that Iraq required to meet its humanitarian needs were simply beyond what the international community would be willing to provide. Only Iraq had the resources to fund its needs provided, if -- of course -- it is allowed to export its oil. Second, Iraq should not have to compete for scarce aid funds with a famine-ravaged Horn of Africa and a cyclone-hit Bangladesh.

In August/September 1991 the UNSC finally relented and passed resolutions 706 and 712 which authorized the sale of oil in the amount of $1.6 billion over six months to finance U.N. operations in Iraq, provide financial resources to the Compensation Fund and pay oil transit fees to Turkey, leaving $669 million for Iraq's imports, a level of funding which had been described by the U.N. Secretary-General as being $800 million short of the minimum necessary to meet Iraq's humanitarian and essential civilian requirements.

The government of Iraq rejected the 706/712 oil sales schemes due to their restrictive terms, which the Iraqi government considered to be a major infringement upon its sovereignty. It is worth noting that the Iraqi technocrats who were in favor of oil export resumption argued that the restrictive conditions were bound to be relaxed and that it would be in Iraq's long term interest to reestablish its position in the world oil market and that the initial oil sales will give a much needed boost to the faltering economy and the collapsing Iraqi currency.

Policy makers in Iraq, however, did not share these views since the thrust of Iraqi government policy was to strive for the total lifting of the sanctions rather than their partial relaxation. This can be seen in the position that the Iraqi president stated in October 1991 when he announced that "it should be clear that Iraq could live under sanctions for 10 to 20 years without asking anything from anyone." (14) Again in 1992 Iraq's deputy prime minister told the UNSC that Iraq was ready to hold talks with the U.N. for the purpose of resuming oil exports provided such sales are not governed by any U.N. resolution. (15)

Although several rounds of negotiations were held between the government and the U.N. they failed to bridge the gap between the two sides and were suspended in 1993. The failure to implement resolutions 706 and 712 meant the continued deterioration of the Iraqi economy and further decline in the living conditions of the people.

OIL-FOR-FOOD UNDER RESOLUTIONS 986/1153/1284/1330

It was not until April 1995 when the UNSC decided to revisit the issue of sanctions when it adopted Resolution 986 allowing Iraq to sell $2 billion worth of oil in every six month period to provide more resources to the Compensation Fund and to fund various UNSC mandated operations in Iraq as well as to help Iraq purchase civilian supplies. Except for the increase in oil income to $2 billion under this resolution, the core of the scheme remains the same. The UNSC retained for itself the required mechanisms to monitor all oil sales and Iraqi government purchases, with all funds moving in and out of a UN-administered escrow account.

With 30 percent of the proceeds to be diverted to the Compensation Fund and other deductions to pay for U.N. operations, Iraq was slated to get $1.3 billion every six months to finance its imports. Again, the Iraqi government decided to reject Resolution 986 thereby plunging the Iraqi economy into a deeper crisis. The collapse in the value of the Iraqi dinar, the resulting hyperinfiation, and the further collapse in what remained of personal income and purchasing power, not to mention the internal political crisis associated with the defection of the president's relatives to Jordan, forced the government in January 1996 to reverse its position and agree to enter into negotiations with the UNSC over the implementation of Resolution 986. It took Iraq's oil almost another year before it was finally exported in December 1996.

In February 1998 the UNSC decided to raise the ceiling for exports from $2 billion to $5.2 billion per six-month phase under resolution 1153 and in December 1999 resolution 1284 removed the ceiling on oil exports altogether but kept all other restrictions in place. In December 2000 under resolution 1330 the share of the Compensation Fund in oil revenue was lowered from 30 percent to 25 percent.

Before leaving the topic of oil and sanctions a few observations regarding investment in the oil industry are in order. Investment in the oil industry, like investment in other sectors of the economy, was disrupted during the Iraq-Iran war then came to a halt in 1990. The embargo which has been placed on the import of necessary equipment and spare parts and which threatened the long term prospects of the industry was finally acknowledged in 1998 when a group of oil experts was sent by the U.N. Secretary-General to study the conditions of the oil industry in Iraq. The March 1998 report of the mission concluded that the industry was in a "lamentable state." Following this group of experts' report the UNSC adopted Resolution 1175, in June 1998, authorizing for the first time, the import of up to $300 million of equipment and spare parts - per six-month phase - for the oil sector. In January 2000 another group of experts in yet another report concluded that the lamentable state of the Iraqi oil industry has not i mproved and that insufficient spare parts and equipment have arrived in time to sustain production. In short:

. . . decline of conditions of all sectors of the oil industry continues, and is accelerating in some cases. This trend will continue, and the ability of the Iraqi oil industry to sustain the current reduced production levels will be seriously compromised, until effective action is taken to reverse the situation. (16)

In response to this new report the UNSC adopted in March 2000 Resolution 1293, raising the cap on imports for the oil sector to $600 million per phase. The problem, however, is not with the level of oil sector imports, although that is important; it is with the UNSC Sanctions Committee's refusal to approve all the contracts which the U.N. Secretary-General had already approved for Iraq's oil sector imports. The disruptive impact of withholding approval of such contracts was expressed by the Executive Director of the U.N. Iraq Program when he told the Security Council:

The Council last year doubled the allocation for oil spare parts and equipment. This was most welcome for the sector that is the lifeline of the humanitarian programme. However, that was the end of the good news -- we continue to experience serious delays and the number of holds placed on applications has become unacceptably high. On the one hand, everyone is calling on OPEC to increase the export of oil. On the other hand, the spare parts and equipment that are the minimum requirements of Iraq's oil industry have been facing serious obstacles in the Security Council Committee. (17)

IRAQ'S DEBT PROBLEM

Iraq, sometime in the 1980s, changed status from a creditor to a debtor country. As was noted earlier the decline in the oil sector and the massive financial requirements of the Iraq-Iran war forced the change in status. And the sanctions imposed since 1990 have denied Iraq, the opportunity to repay any portion of the debt. In a memorandum to the U.N. Secretary-General dated 29 April 1991 the government of Iraq acknowledged that its external debt obligations (installments and interest) were projected to be $75.1 billion at the end of 1995. (18) This figure should be $120 billion by now, assuming an annual interest rate of 8 percent. No other debtor country in the world has Iraq's debt burden in terms of the relationship of the debt to GDP or to exports. It was calculated that with exports of $5.6 billion and GDP of $22.3 billion in 1997, Iraq's debt indicators show that its external debt was more than 5 times its GDP and 21 times its exports. (19) No other indebted country comes close to Iraq's debt burden.

Given the many claims on Iraq's financial resources in a post-sanctions era it is difficult to see how Iraq will be in a position to pay off it's tremendous debt load. Indeed, without the cancellation of all or most of the debt its payments will only perpetuate Iraq's economic and humanitarian crisis. Needless to say that the burden of compensation, if allowed to continue into the future will greatly complicate the tasks of recovery and growth.

CONCLUDTNG REMARKS

At the turn of this century Iraq's per capita GDP was a small fraction of its level of twenty years earlier. The combined impact of the Iraq-Iran War, the Gulf War, the sanctions, the utter dependence on the oil sector and the mismanagement of the economy, transformed a once prosperous economy and a vibrant society into a poor economy and a society laboring under poverty and despair. The country has lost decades of growth and social and economic development. In the decade of the 1990s alone Iraq lost some $140 billion in oil revenue due to the sanctions. No one can tell, of course, when the sanctions will be lifted. But when they are lifted Iraq will face a horrendous task.

Iraq will enter the post-sanctions era with these external claims on its financial resources: over $100 billion of foreign debt; over $200 billion of Gulf War compensation claims; and $100 billion of claims by Iran for its war losses. If to this bill of $400 billion we were to add the replacement cost of infrastructure and other assets destroyed in the course of the Gulf War we would arrive at an astronomical figure of financial requirements which is simply beyond the capacity of the Iraqi oil sector to generate. The government of Iraq will not be able to do much if foreign creditors and war reparations claimants do not forgive or adjust downward their claims. Oil, while essential, will be of limited assistance because of the magnitude of the financial claims on the oil sector. It has been estimated by the Iraqi government's own studies that in order to double production capacity to 6 MBD ten years and $30 billion will be needed. It is very difficult to say that sufficient foreign investment will be available and if so at what terms.

Given Iraq's vast low cost oil reserves and the world oil market's need for ever increasing oil supplies one should not rule out that the necessary capital inflow into Iraq's oil industry will not be forthcoming. According to recent forecasts world oil demand will be such that Iraq's oil will have to be developed. Thus, according to International Energy Agency projections, world oil demand will rise from 76 MBD in 1999 to 117 MBD in 2020. To meet such an increase in demand OPEC oil production is projected to increase from 30 MBD to 58 MBD while Iraq's output is projected to rise from 3 MBD to 6 MBD during the same period. (20) Indeed, it was postulated that a totally rehabilitated and sanctions-free Iraq could expand its production capacity far beyond 8 MBD, easily reaching 10 MBD, and theoretically even 12 MBD under the most favorable conditions. (21)

There is also the important fact that between 1980 and the year 2000 Iraq's population has increased from 13 million to 23 million and is projected to be 34 million in the year 2115. In other words you have an additional ten million people who need to be housed, fed, educated, employed and otherwise cared for at a time of diminishing resources and a smaller economic base. This fact gives rise to the question of how oil income will be distributed and spent in the post sanctions era. On the face of it the answer should be clear, since all sub-soil minerals in Iraq belong to the people. This means that economic and social policies should reflect the preferences of the majority. This will require democratic institutions, transparency and accountability. This obviously has not been the case during the last three decades. The system is one where public and private resources are melded and public office serves as a means for the creation of private wealth.

Given what had taken place in Iraq over the last three decades a complete economic and political overhaul is in order. This overhaul is essential for reasons of social and economic justice. There is another reason for the change which transcends the question of equity. If current institutional mechanisms for the allocation of oil income will continue to function in the future then what guarantees are there that the destructive adventures of the past will not be repeated in the future?

Abbas Alnasrawi is Professor of Economics at the University of Vermont where he has been a member of the faculty since 1963. An earlier version of this paper was presented at a conference entitled "Policy Alternatives to Sanctions on Iraq," organized by Campaign Against Sanctions on Iraq (CASI), held at Cambridge University, UK, 10-11 March 2001.

ENDNOTES

(1.) U.S. Congress. Senate. Committee on Foreign Relations. Subcommittee on Multinational Corporations. "Multinational Oil Corporations and U.S. Foreign Policy," (Washington, D.C.: Government Printing Office, 1975), pp. 37-39.

(2.) Ibid, pp. 83-4.

(3.) Ibid.

(4.) General Accounting Office of the United States Congress, "The Changing Structure of the International Oil Market," (Washington, D.C.: Government Printing Office, 1982), pp. 49-50.

(5.) Abbas Alnasrawi. The Economy of Iraq: Oil, Wars, Destruction of Development and Prospects, 1950-2010. (Westport, CT: Greenwood Press, 1994), pp. 83-100.

(6.) Ibid, pp. 105-118.

(7.) Ibid.

(8.) David Cortright and George A. Lopez. The Sanctions Decade: Assessing UN Strategies in the 1990s. (Boulder, CO: Lynne Rienner Publishers, 2000), pp. 39-41.

(9.) Lawrence Freedman and Efraim Karsh. The Gulf Conflict 1990-1991: diplomacy and war in the new world order. (Princeton, N.J.: Princeton University Press, 1994), pp. 191-193.

(10.) U.S. Congress. House Armed Services Committee. "A Defense for a New Era: Lessons of the Persian Gulf War." (Washington, D.C.: Government Printing Office, 1992), p. 86.

(11.) United Nations. The United Nations and the Iraq-Kuwait Conflict, 1990-1996. (New York: United Nations, 1996), pp. 186-8.

(12.) Ibid: 189.

(13.) Ibid: 273-9.

(14.) Middle East Economic Survey (MEES). (3 May 1991), p. A3.

(15.) Middle East Economic Survey (MEES). (16 March 1992), p. A4.

(16.) United Nations. "Report of the Group of United Nations Experts Established Pursuant to Paragraph 30 of the Security Council Resolution 1284 (1999)," (New York: United Nations, 2000), p. 4.

(17.) B.V. Sevan. "Introductory Statement," by Benon V. Sevan, Report of the Secretary-General Pursuant to Paragraph 5 of Security Council Resolution 1302 (2000) of 8 June 2000. (New York: United Nations, 2000), p. 3.

(18.) Middle East Economic Survey (MEES). (21 October 1991), pp. D6-9.

(19.) W. Elali. "Dealing with Iraq's Foreign Indebtedness," Thunderbird International Business Review. Vol. 42, No. 1. (2000: 65-83), p. 68.

(20.) I. Al-Chalabi. 2001. "Future Prospects of Iraq's Oil Industry," Middle East Economic Survey. (19 February 2001: D1-D7), p. D6.

(21.) Chalabi, F.J. "Iraq and the Future of World Oil," Middle East Policy. Vol. 7, No. 4 (2000: 163-173), p. 163.