In this two-part interview Bonnie Boyd of Pipeline Newsletter, a monthly newsletter on oil markets and political economy, will explain to us the Iraqi oil law and its implications for both Iraqis and Americans. In part one, Bonnie provided us with a primer on the Iraq oil law. Now in part two, she explains the implications of the Iraq oil law.
Question: If the Iraq oil law were passed as it stands now, what would be the advantages and disadvantages to the Iraqis?
Bonnie: The main tightrope that has to be walked in the Oil Bill is this: can this law unify Iraq as a nation? While no one I know has the most current copy of this bill (last available was from February, 2007), I would suggest that the answer is no.
1. The hierarchy between the legislature, the Oil Ministry, the Federal Oil and Gas Council, and the National Oil Company is unclear, it will become a source of political feuding and may require significant constitutional amendment.
2. Iraq has a politically strong Oil Worker’s Union from the previous regime that is never mentioned by name in this bill. They can affect the acceptance of this bill, but they have been left out. Instead, the bill orders investing oil companies to use as much local labor and commerce as possible when conducting oil exploration and production within the state. We should understand that unions, for many states, are the one medium that controls worker safety and competitive wages, and those needs have to be met in the bill or outside of it.
3. The notion of ‘fairness’ presented within the bill’s enactment of the Federal Oil and Gas Council is never defined, and therefore can never be met. Any lack of definition will lead to charges of unfairness, regional resentment, and probably more violence.
4. Problems of fund regulation, environmental regulation, and transparent commerce are not adequately provided for, which will possibly lead to corruption and environmental degradation at worst, and at the least, mistrust between competing constituencies and stakeholders.
5. Oil companies, though allowed to enter Iraq, will not be able to satisfy these competing claims, and if violence over the oil law provisions spread, they will not be able to work except in smaller intra-province or intra-region operations.
All of these problems do have legal solutions. The draft Iraqi Oil Bill has great possibilities for being a strong and beneficial law for the future of Iraq, but not until these and other problems are met. In order for the Oil Law to contribute to Iraq’s prosperity, some of the issues in Iraqi politics outside of the Oil Law have to be settled first. I would include three major issues that must be settled before a viable Oil Bill can be passed. First, de-Ba’athification reform will allow many Sunni citizens a chance to work as individuals, and perhaps mitigate the importance of the Iraqi Oil Worker’s Union as an advocate for Sunni rights. That is not to say that the Oil Union should be abolished, but that its purpose is more complex today than it would be if de-Baathification reform was achieved. Second, a satisfactory Constitutional Reform must be settled, including a better set of laws to preserve minority rights. A completed Constitutional Reform will help set the tone for minority economic rights in the Oil Law and in the oil revenue-sharing bill. Third, I would also include the development of provincial government; and a date for provincial elections. Once provinces have government structures, then constituencies will be fully represented for inclusion in any Oil Bill framework.
Question: If the law were passed as it stands now, what would be the advantages and disadvantages to American Interests?
Bonnie: Even a well-written and fair Oil Law will not please everyone. Yet if the bill proceeds consistently from a reformed constitution and includes all stakeholder concerns, it will increase mutual trust within the state. Increased mutual trust and giving a stake to all Iraqis could help settle conflict and help Iraq turn to rebuilding its shattered state. This could only aid U.S. troops in Iraq. Second, once Iraq has income of its own, it is conceivable that less U.S. investment will be required in reconstruction, security, and other matters.
But an incomplete, rushed or poorly written law will be received in Washington as a benchmark completed, when it actually paves the way for more conflict. We have had many surprises in Iraq thus far, where completed initiatives have not had the expected results. The Oil Law could join this litany of miscalculation if we treat its accomplishment as something to be “checked off the list” without paying attention to its effects and omissions. Passage of the law serves no one if it becomes a further reason for drawn-out conflict.
Question: If the Iraqis do pass an oil law, will we see the price we pay for gasoline at the pump go down?
Bonnie: Two things affect oil prices: supply relative to demand, and the perceptions of supply relative to demand. The price of gasoline at the pump will be affected by the passage of the Iraqi oil law under both of those effects, but the outcome will be delayed and also not smoothly implemented. First, supply may go up, but not in a great amount right away. A new oil well takes five or more years to develop; if it is an offshore well, it generally takes ten years to bring on-line. At the same time, pipelines must be repaired and/or other methods of getting oil supply into market distribution have to be determined. The time constraints and distribution problems of oil production are often-neglected aspect of oil supply in the news.
The price may well go down on the petroleum “spot” market. I don’t believe much in forecasting of this nature, but I’ll go through some alternatives and make a wild guess. The spot market deals more in perceptions, and in instantaneous needs of short-term supply and demand. When Iraq’s Oil Law is passed, if it allows for stable oil provision, whatever its character, then perceptions that oil supply will remain forever tight will ease up a little, and price will go down. Should Iraq also allow comprehensive direct investment by independent oil companies and state-owned exploration companies, (and hopefully in the form of production sharing agreements), then the spot price may well go down, and oil company stocks will likely go up as they bid on Iraqi oil reserves. However, since spot markets are volatile, there are few guarantees. If increased production is stopped by an accident or violent act, then the spot market price may swing up and then back down. Curiously, it can be that separate events create wide price swings—as it stands now, with one unhappy event after another in regard to Iraq, it just looks like one long bad event for oil markets. As production eases up but is punctuated by setbacks, the spot market price could swing more frequently.
Question: In our correspondence, you have indicated that there are other issues beyond ownership of the oil, like distribution, that could also be an area of contention. Could you explain that?
Bonnie: The main challenge, from which all these other challenges are subordinate, is to keep Iraq together. Distribution realities reinforce the need for competing constituencies to share and share alike, and therefore keep Iraq united. A law that does not meet the standards of the areas that have oil, such as Kurdistan, will fuel a separatist movement. Should Kurdistan depart from Iraq, for instance, and Southern Iraq from West Iraq, there will be a large, unhappy Western Iraq which will have no revenue, and little to attract international investment.
One has to remember, too, that Kurdistan and other “haves” may sit on top of the oil, but they do not have geographical access to the Persian Gulf. If Kurdistan separates, it will still have to negotiate transit deals across Western or Central Iraq and into Southern Iraq. Or, it could send oil through Turkey; or to Syria; or even to Iran. If pipelines do not transit Western and Central Iraq, what do you think that Western Iraqi citizens will do in order to survive? In such a position, the area might well turn into spoilers for everyone else: a failed state or region such as Somalia or Pakistan’s Northwest Territories, which have been havens for terrorist organizations in the past.
There is a subtext to many of the omissions in the Oil Law thus far for Sunni interests: Predominantly Sunni West Iraq does not have oil; it has neither an autonomous district government nor provincial governorates. Most Sunni citizens were members of the Ba’athist Party; most oil workers were Ba’athist and also members of the Iraqi Oil Worker’s Union, and the Iraqi National Oil Company. You can see how this law sidelines this constituency repeatedly on economic grounds, which also sows the seeds for continued sectarian violence.
Last of all, current conflict, the Oil-for-Food Program, and corruption in Iraq during Saddam Hussein’s regime have made the illicit transfer of oil a settled practice within Iraq. It will take a strong law and a strong sense of purpose among Iraq’s citizens—plus the provision of utilities and other important reconstruction initiatives—to help Iraq’s Oil Law enhance a legal state economy.
Question: Do you think the current Iraqi government will be able to reach an agreement about the oil law?
Bonnie: There are many distinct possibilities, but let’s look at two: first, that Iraq will pass a fair and well-written Oil Law that enables the state to hold together within the borders as we know it. This is a very possible solution, but it requires vision and consultation with as many stakeholders as possible. Should that occur, Iraq will make progress toward ensuring world oil supply, its own unity, and its own income.
The second is that the state will break apart amid continuing violence, and that several states and regions will appear. Each one of these will also want to partake of oil revenue, through sales or through distribution tariffs. If Iraq separates, existing problems of distribution/delivery and security do not disappear, but become displaced: an international rather than a domestic matter. It will polarize further the “haves” and “have-nots” in the rush to build several economies. This will create more instability in the near and medium term. Eventually, though, the oil will come out of the ground, make it to a port, and be purchased. It is a question of time, and the amount of violence and risk.
In my view, it is essential to medium and long-term stability of supply that Iraq remain one nation with an agreed-upon framework for revenue sharing. The Oil Law can help the Iraqi people unite in their efforts to build an economy, and to build the mutual trust that is implied by a viable economy. The Oil Law must be a foundation for the long road ahead.
When we watch the nightly news, we hear the Iraqis are unable to reach an agreement to share the oil in their country. I think Bonnie shows us that there are many complex issues for the Iraqis to resolve.
Bonnie Boyd has a Master of Arts in Diplomacy degree from Norwich University and writes a monthly newsletter, The Pipeline, on oil markets and political economy. She also blogs for the Foreign Policy Association’s Great Decisions Central Asia blog, and at her own site, Ramblin’Gal. She is currently writing a book on the Baku-Tbilisi-Ceyhan Pipeline.