Iraqi Oil: Resource Curse or Glorious Blessing?

Delicate balance: this situation is similar to the previous one but Iraq would be unable to utilise most of its available incremental production capacity for a variety of reasons such as OPEC quota etc. This remains to be a negotiated win-win situation since idle capacity could be compensated by higher oil prices to maintain remunerative oil export revenues. But again, idle capacity has its cost as well. The balance, or the trade-off, is therefore delicate because this situation implies a lower resource depletion rate, which is in Iraq’s favour and with higher prices and a good level of exports this would cushion the cost of idle capacity. But if Iraq insists on a higher utilisation of its production capacity, this could increase supply and might reduce prices and thus revenues, with faster resource depletion.  

Risky endeavours: when global oil demand is low so is the oil price and spare capacity is at its peak. If Iraq uses more of its incremental capacity, it would push oil prices downwards. So what it gains through higher production, it loses through lower prices, therefore this is a risky situation since it could lead to lower oil export revenues coupled with a high depletion of oil reserves.Lower oil prices with fixed remuneration fees per produced barrel lead to further decline in net export revenues in addition to faster resource depletion. Hence this is risky situation, which Iraq should avoid.

Nightmare: this is the worst case scenario characterised by low global demand for oil, lower prices and lower utilisation of incremental production capacity, leading to lower oil export revenues. Though this situation leads to lower resource depletion, the idle capacity has its own cost due to contractual obligations for paying remuneration fees for the idle capacity during such a situation. Maintaining an idle capacity could be very costly indeed. And if the capital investments have not been fully recovered then the obligation for their payment would aggravate the situation even further. Furthermore, when oil production capacity has forward, backward and horizontal linkages, such as associated gas-based power generation and petrochemical industries, then idle capacity could have very serious ramifications beyond the upstream sub-sector. This results in deepening the fiscal crisis of the state due to lower revenues, higher payment obligations and contraction in economic activities on a macroeconomic level.          

Third, Coping strategies. Each of the above possible situations is very complex and highly vulnerable to exogenous factors. The implications of each situation for Iraq are far-reaching in all directions- positive and negative, depending on the actual timing of their occurrence, the duration and magnitude of each situation, and the factors and conditions that led to such situations etc. Their occurrence and recurrence are possible but unpredictable; the actual timing could be anticipated with accurate information and sound analysis; the duration is not possible to measure beforehand though. With a prudent monitoring system in place, some indications and predictions could be made, and the same applies to the magnitude of each possible situation. Historically, and as evidenced by data and analysis, one would be safe to suggest that while each situation is possible as part of the cyclical nature of economic activities worldwide, it is less likely that a specific situation will last for the duration of the 20 years covered by these oil deals. Thus, Iraq could very well face all or any combination of these four possible situations during the timeframe of these oil contracts.

Therefore, Iraqi decision makers should start from now serious professional dialogue on these possible situations; the needed feasible policies to protect from and mitigate their highly probable effects; and the required institutional and frameworks responsible for formulating, implementing and assessing the policies and strategies. This entails debating, formulation and adopting a set of strategies to deal with each of these four eventualities. Flexibility, adaptability and continuous revision should be among the features of such strategies. This is essential since the probability of facing any of these possible scenarios could be high and unpredictable.

 

Finally, what should be highlighted at this juncture is that a detailed formulation of the necessary strategies, institutions and frameworks is obviously beyond the mandate and jurisdiction of the ministry of oil. These matters point to broader macroeconomic and development policies, which have to be taken at the highest level of decision-making in the country. Iraqi decision maker should not be reactive or adopt a fire-fighting approach by handling a situation when occurs. Instead they should be proactive and preparatory with high degree of readiness to manage any possible situation. Issues pertaining to good and effective governance, transparency and accountability are very significant and thus a related mechanism should be in place. Bridging skill and capacity gaps is critical and must be addressed seriously and effectively. The question, though, is whether the political climate and set-up would be mature enough to create an enabling environment to formulate, manage and execute such needed strategies. Iraq’s cooperating partners (on bilateral and multilateral levels) could make significant contributions in assisting the country to chart through the complexities of these possible scenarios.  

 

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