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.