The War In Iraq and American Energy Security

April 23, 2003
By Martha Brill Olcott

The full impact of the U.S.-led war to liberate the people of Iraq will not be known for several years, until an Iraqi civilian government demonstrates its capacity to govern. Until that time the risk of instability throughout the Persian Gulf will remain quite high, and if democracy-building efforts in Iraq are successful, many Persian Gulf regimes will be further undermined.  

American energy security depends upon many other nations. Recent work stoppages in Venezuela and Nigeria affected the supply of oil to U.S. markets, and could be a harbinger for problems that may lie ahead for producers in the Caspian region. Crises in the oil industry in one part of the world may create unexpected security risks for the U.S. elsewhere in the world, as states try and insure their steady access to reserves.     

Threats to Energy Security in "New Producing" States 

Turkmenistan, Kazakhstan and Azerbaijan all must eventually transfer power to a post-Soviet generation. Heydar Aliyev, 79, of Azerbaijan is a real political survivor, but even he cannot cheat death indefinitely. At the very time that “big” oil begins to flow through the much-debated Baku-Tbilisi-Ceyhan pipeline, Azerbaijan could find itself going through a difficult political transition. 

Saparmurad Niyazov of Turkmenistan and Nursultan Nazarbayev of Kazakhstan are in their early sixties.  Niyazov has so alienated the Turkmen elite that, in November 2002, they attempted a coup against him. The Turkmen leader has offered Russia generous terms to market Turkmen gas in return for domestic security guarantees.  

Although praising Kazakhstan’s special relationship with the United States, Nazarbayev often sides with Russia’s president Vladimir Putin against the United States, as he did on the question of war in Iraq.  The deteriorating political situation in Kazakhstan is beginning to resemble Nigeria, although the level of corruption in the landlocked Caspian state is still not as pervasive as it was in Nigeria under military rule. But pressure on Kazakh opposition groups has grown, as charges of presidential corruption became the subject of a New York court hearing. 

Too often American policy-makers tolerate the foibles of dictators of oil-rich states, only to make access to oil less rather than more dependable. When the government of Nigeria returned to civilian rule four years ago it was too late for quick fixes. Preparation for the presidential elections triggered the recent violence, but the real cause was decades of neglect by Nigeria's rulers. While the military dictators were in power, the thrust of American policy was to support American businesses involved in the country and provide only minimal assistance to the regime in power.  Since the return of civilian rule, the United States has made a substantial increase in assistance money available to the Nigerian government and non-governmental agencies working in the country. However, this assistance money is unlikely to lead to rapid solutions in Nigeria, and the ethnic violence, already responsible for over ten thousand deaths, could escalate.

The demographic mosaic of Kazakhstan is not nearly as complex as that of Nigeria, but ethnic and sub-ethnic divisions are critical there too.  Should political succession fail to meet the expectations of the prominent families of the Small Horde (from oil-rich Western Kazakhstan) or solely reward those from the Great Horde (President Nazarbayev’s group), or those of the Middle Horde (in northern and eastern Kazakhstan, whose elite generally favor close ties with Russia) the risk of territorial secession would become real.  

Venezuela’s strike was caused by the mismanagement of its oil industry, the country’s principle source of income. The state oil company is that country's largest employer.   Added to the mix was a controversial and unpopular president, with a legacy of bad choices made in using foreign investment income. Similar crises could develop in Azerbaijan and Kazakhstan if new National Oil Funds are not distributed to their populations. The next presidents in these states will likely be less popular than the current ones and are more are likely to turn to Moscow instead of to Washington to bolster their regimes. The Kazakh oil and gas industry is becoming increasingly more intertwined with Russian interests at the very time that Kazakh relations with leading American energy companies are becoming more strained.  

Political succession could put new pressures on western investors in Kazakhstan, and this succession is likely to occur in the period (2005-2010) when Kazakhstan’s new large oil fields come fully on line. The relationship between Baku and Moscow is more complex, given Moscow’s tacit support of Armenia in the Nagorno-Karabakh conflict.  But Azerbaijani realists appreciate the many levers Moscow can use to secure or undermine their leaders.   

Can Russia be a stabilizer in neighboring states? 

From the onset, the Russian-American energy partnership, has been mostly hype. Talk of cooperation with Russia put Saudi Arabia on notice that, to preserve their privileged place in the American market, they had to be more forthcoming with their oil.  At a time when American policies were marginalizing Russia internationally, the energy partnership seemed a reward for Putin’s support in the War on Terrorism and his quietly acceding to the opening of U.S. military bases in Central Asia. 

In reality, though, Russia’s sense of national interest diverges in key ways from that of the United States, but its energy resources are considerable. While Russia is unlikely to have a Venezuelan style economic crisis, it is still not clear how large or how stable a force Russia will be in the international energy market.   Russia’s oil industry is still evolving, and the divide between private and state-owned companies is still not a fixed one.  Moreover, it is unclear whether the Russian government will ever give up full ownership of its assets, nor regularize the terms for foreign investors’ participation in their development.  Russians investing in their own in the oil and gas sector has also faced serious road-blocks, not the least of which is the difficulties posed by the continuing state monopoly on the transit of oil and gas.   BP’s recent acquisition of a 25 percent stake in Russia's TNK oil company is the first real show of Western confidence in the Russian oil industry in quite a long time.  But it remains to be seen whether other Russian firms will sell stakes sufficient to give Western companies the managerial role necessary for them to make such an investment.  

Looking Ahead in the Persian Gulf 

The U.S. military occupation in Iraq will be a time of uncertainty in the Persian Gulf and in the Muslim world more generally, where many see the U.S. presence as a form of thinly disguised twenty-first century-style colonialism. Public opinion outside of Iraq has been heavily against the U.S.-led war effort. It is also hard to imagine that the United States can devise successful public relations efforts in the Arab world in the absence of a comprehensive peace settlement for the Arab-Israeli conflict. This is bad news for the Saudi regime in particular, which could experience its own version of the Venezuelan oil crisis.  The country has growing numbers of young people rendered virtually unemployable by the religiously dominated education system. The regime now recognizes the need for economic and political reforms, but the role of religion in Saudi Arabia insures that the changes will be little more than tinkering.  

American energy security in the Persian Gulf will be very heavily influenced by how the United States exercises its authority in Iraq. The less the transition authority seems like an occupation force, and the less the transitional regime can be accused of being a puppet for U.S. interests the less anti-American sentiment will be further stimulated in other oil-producing states and the Arab and Islamic world more generally. 

Most outside observers will be closely watching how the Iraqi oil industry is managed, whether oil income goes to help support military occupation and administrative costs, or if it is solely directed for the purchase of food and other humanitarian assistance for the Iraqi people.  There will also be a lot of attention to how the contracts are let for rehabilitating Iraq’s oil-wells and repairing the country’s infrastructure, as well as how the choices will be made as to the ownership of Iraq's undeveloped reserves.   

Security and Oil Dependency 

The United States (and virtually all of our allies) consume more oil resources than they produce, insuring that the question of energy security will remain a constant one.  Modifications in the operation of international oil market introduced after the 1973 Yom Kippur War provide protection against sudden changes in supply, but all remain vulnerable to cataclysmic changes and to dislocation provided by several producing nations simultaneously reducing their exports.  

Uncertainties in the international oil market can cause security problems for the United States, even when a steady supply to U.S. markets is maintained.  High prices of oil, especially unexpectedly high prices, disrupt the economic plans of less developed states, making fragile states even more fragile, destabilizing whole sub-regions of the world.   

Rapidly industrializing states with growing energy needs are highly vulnerable to changes in the price and supply of oil. China, a country whose need for energy resources is growing and whose economy can not easily absorb sharp jumps in price or shortages, is particularly vulnerable. Its search for energy security could create unexpected security challenges, since Beijing is looking to Russia, Iran and the Caspian as well as states in the Middle East for new partnerships.

It is still too early to predict the impact that this war will have on the oil industry in Iraq, not to mention the political climate in neighboring oil producing countries and in the Middle East region more generally. The fact that there are certain to be long-term and unpredictable outcomes of the War in Iraq on energy security highlights the way in which oil specifically, and energy more generally is intertwined with a host of other security factors.                                               

Martha Brill Olcott is a senior associate at the Carnegie Endowment for International Peace (www.ceip.org) and the author of Kazakhstan: Unfulfilled Promise.  She testified on this question before the U.S. Senate Foreign Relations Committee (Subcommittee on Foreign Economic Relations) on April 8, 2003.