Sunday, August 01, 2004
Iraq and the oil factor
Posted by David Smith at 08:59 AM
Category: David Smith' s magazine articles

This year, as manufacturers know, high oil prices have returned as significant factor. The rise in prices to a record high of more than $42 a barrel in the summer, and the apparent certainty of $30-a-barrel plus crude for the foreseeable future is a reminder of our continued vulnerability to this most economically-significant of commodities.

The latest scare reflected a combination of several factors. A synchronised global economic recovery, sharply rising demand from China – now taking its permanent place as one of the world’s big economic players - the security situation in Iraq, terrorism fears in the Middle East, the situation at Russia's Yukos, all combined to push crude prices well above $40 a barrel (35 gallons).

Adjusted for inflation, prices have been higher in the past. After the fall of the Shah of Iran in 1979, prices rose to the equivalent now of nearly $80 a barrel. Readers will not need reminding of the savage manufacturing recession that this, combined with high interest rates and a high pound, caused.

But the oil story always comes back to the Middle East, and with good reason. The latest BP statistical review of world energy, the industry’s bible, underlines the huge importance of the region.

Saudi Arabia, with 36 billion tonnes of proven reserves, has 22.9% of the world total, followed by Iran (18 billion), Iraq (15.5 billion), Kuwait (13.3 billion), the UAE (13 billion), Venezuela (11.2 billion) and Russia (9.5 billion). Nearly two-thirds of global oil reserves are in the potentially unstable Middle East. America, where the global oil era started a century ago with the discovery of the Spindletop field in Texas, is estimated to have only 4.2 billion tonnes left, and only just scrapes into the top 10.

While the reserves are mainly in the Middle East, the demand is plainly elsewhere. The United States accounted for no less than 25.1% of global consumption last year, followed by the EU, with 17.6%, China (7.6%), Japan (6.8%), Russia (3.4%) and India (3.1%).

The world’s reliance on the Middle East suggests that oil crises, probably more serious than this year’s, will be an all-too-frequent occurrence. The vulnerability of Saudi Arabia, the world’s pivotal producer, is worrying. With its attacks on Western targets in the country, particularly expatriate oil workers, Al-Qaeda has already demonstrated a new and potentially dangerous tactic.

One big question, however, concerns the role of Iraq. On June 28, two days earlier than planned, America handed Iraq over to the country’s interim government. After its recent bloody history, and the war, Iraq has begun to make the slow journey back towards democracy. If it succeeds on that journey, the implications could be hugely significant.

Conventional wisdom is that the big achievement in Iraq will be getting oil production back to its pre-war levels of around 3m barrels a day. That would restore the country to its position as a major oil producer but, compared with Saudi’s 9m-10m barrels a day would leave it as a junior partner. Raising production much beyond that, the argument goes, will require huge investment in an infrastructure run down badly during the Saddam years.

But according to Leonardo Maugeri, a senior vice-president at Eni, the Italian state oil and gas firm, conventional wisdom hugely understates Iraq’s potential. In a recent article, he pointed out that Iraqi oil has never been properly developed, not least because Iran, Kuwait and Saudi were the preferred Middle East locations for the oil majors.

The result is that only a minority of Iraq’s fields have been developed. As he put it: “A large part of the country—the western desert area—is still mainly unexplored. Iraq has never implemented advanced technologies—like 3-D seismic exploration techniques or deep and horizontal drilling—to find or tap new wells. Of more than 80 oilfields discovered in Iraq, only about 21 have been at least partially developed. And 70 percent of current capacity derives from just three old fields: Kirkuk, discovered in 1927, and North and South Rumailah, discovered in 1951 and 1962, respectively.”

Iraq’s true oil reserves, he suggests, could be more than 300 billion barrels, rather than the currently accepted 110 billion. If he is right, the potential for a stable Iraq is huge. And it will shine a light amid the current gloom over oil.

From The Manufacturer, July 2004


Iraq's potential for expanded oil production from it's low levels before the war is the biggest reason it was the first middle-eastern swamp targeted for draining. It's production capacity will provide the world with the necessary supplies as Iran and Saudi Arabia undergo similar conversions to representative democracies. Uncertainty over damage and sabotage to these other suppliers makes outside imposed changes in these regimes unlikely until Iraq can supplant these suppliers. This is not strickly a US oil supply problem. Significant disruptions in oil supplies is a world problem. And yes, the US must grow up and drill in Alaska.

Posted by: Gary B at August 3, 2004 04:47 AM

An interesting adjunct to above is looking at current consumption and production figures in Billion ton/yr (rather than barells/day). This shows US, Canada, Norway and UK reserves at under 10 years at current production rates, and 37 years for the world - again assuming existing reserves and useage rates. In the next 5 years as developed country reserves expire the only real players are mid east, with over 80% of reserves. USA with 22 billion barrels reserves, and consumption of 7.2 billion barrels/year has equivalent of 3 yrs consumption as reserves. All figures from, but similar to above.

Posted by: Matthew T at August 6, 2004 03:33 PM