Resolving Shia, Sunni, and Kurdish Claims Over Oil Revenue in Iraq

Friday, September 21, 2007

The United States, with support from the United Kingdom, invaded Iraq on March 19, 2003. The forces of Saddam Hussein were routed in a brilliant military campaign that lasted three short weeks. Toppling Saddam’s statue in central Baghdad, followed by President Bush’s talking about the “end of major combat operations when he landed on the aircraft carrier USS Lincoln on May 1, 2003, laid the foundation for a new Iraq, hopefully democratic, pro-Western, and an ally against al-Qaeda and other radical Islamic forces in the Middle East.

Pacification of Iraq, the establishment of a viable multi-ethnic coalition government, and the defeat of al-Qaeda insurgents has not gone so smoothly. No one predicted the savagery of the jihadist insurgenncy. U.S. forces are in their fifth year of occupation, with prospects for achieving a stable democratic Iraq in doubt. The president, members of Congress, retired and active military officers, political commentators, the American public, and friendly countries in Europe disagree on how much progress is being made and if U.S. troops should be reduced or withdrawn within a fixed period of time. The original objective underlying the invasion involved eliminating weapons of mass destruction (WMD), but it was also based on Saddam’s use WMD against his own population, violating ceasefire agreements from the 1991 Gulf War, failing to cooperate with United Nations’ weapon inspectors, and violating 17 UN resolutions. The failure to find WMD brought a change of objectives to establishing a stable democratic government, which has not gone smoothly. A further objective is the need to keep sufficient forces in Iraq is to avoid a bloodbath between opposing religious and tribal groups, and possibly broader instability in the oil-rich Middle East, in the event that U.S. troops were precipitiously withdrawn. Another matter is the issue of curtailing the influence and support of the jihadists of Syria and Iran, which continues to destabilize the situation.

The invasion and occupation of Iraq along with overthrowing the Taliban in Afghanistan and providing support for its new government have been extremely costly. Originally estimated at perhaps $100 billion, the cost has amounted to some $500 billion through the end of fiscal year 2006 (October 1, 2006, to September 30, 2007). Of this, expenditures in Afghanistan have amounted to about $100 billion, with the bulk of the remainder for Iraq. For fiscal 2007 (October 1, 2007, to September 30, 2008), the Congress has passed a Pentagon defense bill totaling $459.6 billion, along with another $150 billion for Iraq and Afghanistan. The higher figure for Iraq and Afghanistan over previous years is to underwrite the expense of more extensive infrastructure in the form of semi-permanent support bases for U.S. military personnel, the purchase of armored Humvees, new tanks and other equipment, and to include repair costs for damaged equipment. The higher outlays imply a long-term substantial presence in Iraq, until such time that the bases and equipment can be turned over to Iraqi forces. Few believe this can be accomplished anytime soon.

Iraq’s pre-invasion oil production was around 2.6 million barrels a day. Oil experts judge that Iraq has the second largest level of oil reserves in the world after Saudi Arabia. Over the past six years, oil output has fallen to about 1.9 million barrels a day, of which 1.4 million is exported. Oil income represents 60 percent of Iraq’s gross domestic product and provides almost 90 percent of government revenue. Oil is the lifeblood of the Iraqi people, which means that control over oil revenue determines income and opportunity.

How much money does Iraq currently earn from its oil exports? Assuming continued shipments of 1.4 million barrels a day (511 million barrels a year), and a price of $80 per barrel, Iraq can expect to earn about $41 billion dollars this year. New investment in oil production would raise that figure, assuming global demand for oil remains strong. China’s insatiable demand for energy resources, along with such other rapidly-growing economies as India, is likely to keep demand in step with, or outpace the growth of supply, thus sustaining high prices.

Although Iraq faces numerous problems in striving for political stability, the largest concerns the distribution of oil revenue. Shias control oil reserves in the south, Kurds control reserves in the north, but the western part of the country in which the Sunnis are predominant lacks proven reserves. Unless they are able to share in the country’s oil wealth, the Sunnis face economic hard times. Perhaps large-scale exploration might discover oil in the west of Iraq, but any such effort requires a much greater measure of peace and stability in the region.

Resolving the issue of an equitable distribution of oil revenue among Iraq’s ethnic groups is a necessary but not a sufficient condition to achieve political stability. Another important issue is deciding the degree of decentralization in the post-Saddam era. One approach is to copy the Swiss and Belgian models in which the bulk of political, economic, and budget authority resides in the regions, as against working for a strong central government in the hope that one will emerge in time. The reported success in Anbar Province in the summer of 2007, during which tribal Sunni sheikhs joined U.S. forces against al-Quade, suggests that the decentralized model may be more viable. Others matters involve curtailing the destructive activities of al-Quade, eliminating the harmful interference of other countries in the internal affairs of Iraq, getting support from traditional U.S. allies, reducing corruption, and ensuring a system of free and fair elections to name a few. But an agreement on the distribution of oil revenue remains the first hurdle to stability.

There are no precise numbers on the composition of Iraq’s population. Of the 26 million people in the country, it is believed that the mainly Shia Arabs constitute 60 percent, Sunni Arabs about 20 percent, Kurds about 17 percent, and other groups the remaining 3 percent. Suppose the United States was prepared to guarantee the Sunnis its pro-rata share of Iraq’s annual oil revenue. What would that cost?

Assuming current prices and exports, the Sunni share of annual oil revenue would amount to about $8 billion. This is a large sum in absolute terms, but pales against U.S. military expenditure in Iraq, which are currently running about $2 billion a week according to the Congressional Research Service, and will rise to $2.5 billion or more in fiscal year 2008.

It is difficult to estimate the future price of oil. To illustrate the cost of satisfying Sunni aspirations to its fair share of oil revenue, assume a Sunni share of $10 billion, which represents a month’s military expenditure. Taking into account possible increases in exports and a gradual rise in the price of oil, the annual cost of insuring that the Sunnis receive their proportional share of oil revenue for a decade comes to one year’s supplemental appropriations for military expenditures in Iraq.

How might the U.S. accomplish this approach? The modalities of working out an insurance policy are important. Americans may initially resist the idea of writing a check each year for a decade to Iraqi Sunnis for their proportional share of oil revenue, but perhaps they could be persuaded that the savings in lives and money warrant the subsidy. If the Sunnis discover oil in their region, or if they are able to obtain a share of Iraq’s oil revenue, the U.S. could make up any difference between what they receive and their pro-rate proportion.

Eliminating the issue of sharing oil revenue would remove the largest obstacle to bringing about some kind of reconciliation between the Shias and Sunnis. Each group would be guaranteed its proportional share of annual oil revenue. Unless this issue is resolved, the Sunnis have little incentive to join in a multi-ethnic coalition government in which they cannot insure their fair share of Iraq’s oil wealth. Perhaps the United States could persuade the Saudis, Kuwaitis, and Emirates to bear some of the cost of this subsidy to insure the safety and well-being of their fellow Sunnis in Iraq and a greater measure of stability in the region.