Wednesday, February 08, 2006

Here's a conundrum for you to solve:
To achieve a level of security that would allow the coalition forces to go home without leaving a big mess behind them we need money, this money will only come from oil exports and to achieve that level of oil production we need big foreign investment in the maintenance of oil fields but that investment won't come unless the security situation improves.

Security needs money,
Money comes from oil,
Oil needs foreign investment,
And foreign investment wants security.

I'm sort of revving up my engines for another couple of video-blogs and I have decided to tackle the economy this time. This is just an attempt to organize my thoughts really, numbers make my head ache so I will have to figure out how to do this with pictures and charts.

The Madrid donor conference put a US$ 50 billion price tag the on cost of reconstruction in Iraq. The US administration appropriated about $20.9 billion towards the Development Fund for Iraq but with recent headlines like "Auditors Find Widespread Waste and Unfinished Work in Iraqi Rebuilding Contracts" (NY Times) and "So, Mr Bremer, where did all the money go" (Guardian) I don't really think the alleged $12 billion that were "disbursed" did go to all the right places.

Non-American pledges at that conference totalled $13.6 billion and out of that only $2 billion were disbursed, which you have to admit is pretty pathetic. Our PM went to Japan a couple of months ago to beg some more but no one paid much attention. The main reason for the delay in depositing the money with the World Bank's trust fund has been the ongoing violence and instability in Iraq, which donors fear will undermine rebuilding efforts.

The war was sold as something that can be done on the cheap because Iraq was basically supposed to pay for its own reconstruction with its big oil reserves. Then-Deputy Defence Secretary Paul Wolfowitz (now the president of the World Bank) made it clear that Iraq's oil was going to save American taxpayers a lot of money.

Wolfowitz told Congress on March 27, 2003, that the U.S. was "dealing with a country that can really finance its own reconstruction, and relatively soon." He added that Iraq's oil revenues could "bring between $50 billion and $100 billion over the course of the next two or three years."

In fact the Department of State's reports say that oil revenue over the last 3 years has been approximately $45.5 billion but this money seems be going down a black hole. The money is not paying for reconstruction and Iraqis are not enjoying any energy riches. The only reason we reached the target predicted by Wolfowitz is because the price of oil has practically doubled over the last three years. Oil export has been declining since September last year - from 1.61 million barrels per day to 0.92 MBPD - according to the Department of State.

Why am I quoting US sources?
Simply put there are no gauges on the pipelines, they're broken. This has been the case since the days of Saddam. We depend on estimates and outside sources to guess how much oil is being pumped into oil-tankers. And the ministry of oil doesn't publish numbers. During Saddam's days this was very convenient to smuggle oil and I guess this is still the case.

98% of the Iraqi government's budget comes from oil revenue.
Which begs the question what's the 2%? Iraq's biggest export after oil in 2003 was scrap metal. Where did you think all the junked tanks and artillery went? And it seems we export some dried fruits as well!!
Praise be to Allah for the dried fruits, just imagine what we'd do without them.

Back to the issue at hand, so oil production and export has been falling and with it hopes of a less painful reconstruction effort. Why did it go wrong? Well here are a couple of reasons:

One: The oil fields are in bad shape. No maintenance work has been done on the fields and the infrastructure for a very long time. Saddam used a pump'em-till-they-die policy and now experts say that the industry needs about $10 billion in immediate investment just to stabilize production from the existing fields.

Two: the insurgents are doing a pretty good job in crippling Iraq's oil industry. Iraq Pipeline Watch lists 295 attacks on Iraqi pipelines, oil installations, and oil personnel since mid 2003.
With all the talk about oil-rich Kirkuk exports from the oil fields there aren't even counted in the monthly averages because it is so erratic and gets continuously disrupted by attacks, so one of our biggest oil fields is just sitting down and twiddling its thumbs.

And one of the biggest ironies is that the Iraqi government has to spend around $6 billion a year to import oil products because the refineries are not producing enough and demand has increased. We practically import about half of the oil products we need.

Number of registered cars
Pre-war: 1.5 million
October 2005: 3.1 million

No only that but the government is spending around 38% of its revenue on fuel and food subsidies (if you add electricity it will be more than half of Iraq's GDP).

Cost of imported gasoline: 30-35 cents
Domestic price: 13 cents

And one more fun-fact for the road

Number of foreign banks granted licenses in Iraq: 6
Number of foreign banks that have started operations: 1


most of the numbers and statistics are from
The Department of State's Iraq Weekly Status Report
and the recently published Iraq Index by the Saban Centre for Middle East Policy. which is worth taking a look at, it is hours of fun for all the family.