Iraqi Oil: Resource Curse or Glorious Blessing?

RT: Nouri al-Maliki recently talked to delegates from the World Bank about the need to diversify Iraq’s economy and not become dependant on oil revenues. So far, there is a variety of economic activity in Iraq from new car and cement factories to strawberry farms. But this represents only a very small part Iraq’s economy, which exports very little except oil and gas. From your experience in the petroleum industry do you think Iraq can escape the “oil curse” of depending too much on petrodollars?

AMJ- This is a broad and complex question that needs lengthy and elaborated answer, but I will be very brief. Firstly, Structural oil dependency and its possible entrenchment. Oil has and probably will continue to occupy a critical role in all aspects of the Iraqi national economy. This is manifested in the contribution of the oil producing (upstream) sector in the main macroeconomic indicators such as gross domestic product (GDP), ordinary budget, investment budget, trade balance, export earnings, balance of payments and government revenues, among others.

However, previous economic plans up to the current one (2010-14) aimed at reducing dependency on oil by developing the contribution of other non-oil sectors have become such a feature of Iraqi politics as to become a cliché. The outcome has been disappointing and very marginal. This would indicate that development efforts for nearly six decades have failed not only to deliver sustainable development but have consequently made Iraq’s dependence on oil irreversible, unless serious re-thinking and concerted action is taken.

The economic degeneration which the country had gone through since the early 80s would only deepen the dependency even further, especially with the current drive to adopt the “big-push” option in the development of oil production, as mentioned above. Petroleum production is generally characterized with the existence of an economic rent, generated from international oil prices. A fundamental feature of economic rent is that it is generated exogenously from the outside world and accrued directly to the government, thus creating a condition of a renter State. Hence, economic rent has, and could generate, substantial and deep-rooted impacts on the State and its economic, social and political performance and behavior. In economic and developmental terminologies and discourse, economic rent is usually associated with three known concepts/ theses and their interrelationships which have, over the years, been the focus of debate and analysis, these are: absorptive capacity, Dutch disease and resource curse. The Iraqi economy suffers from all them, and what is needed are concerted well planned policies and clear strategies not empty rhetoric, or promises.

Secondly, challenges and scenarios. Iraq will face three challenges: first, installing the contracted (even if revised) upstream petroleum production and export capacity; second, how to utilize these capacities in most optimised way and third, how to address the spending, investing and saving (SIS) dilemma to allocate generated export revenues within a vision of sustainable development. Considering the above, Iraq is bound to face many possible situations pertaining to its energy and development outlook over the duration of the concluded contracts. Accordingly, Iraqi decision makers should start from now to explore all possible situations regarding the targeted oil production and export capacity with a clear vision, functional mission and relevant action on one side, and preparing the needed coping strategies accordingly on the other. Four possible development scenarios could face Iraq, and are envisaged under High/Low Incremental Production Capacity Utilization within High/Low Global Demand for Oil.

Honeymoon situation. This scenario occurs when global demand for oil is high enough to allow Iraq utilise most if not all its available incremental production capacity. Such a market fundamentals driven situation implies high oil prices leading to higher oil export revenues. Hypothetically, this is a win-win situation by default and assumes global demand for oil exceeds available supplies with no significant spare capacity available, so the OPEC quota becomes redundant and irrelevant. This situation also implies a fast/high depletion of Iraq’s oil reserves.  

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