Recently the Swedish Oil and Gas Network graciously invited me to attend one of their seminars, and perhaps share with guests from abroad some of my thoughts on Iraqi oil, which was the subject of the meeting.
The only drawback was that I don’t really know anything about the energy resources of that country. Saudi Arabia and the Emirates maybe, and perhaps Kuwait and Qatar, but absolutely nothing on Iraq, and so I turned to the leading expert in the world on Middle East oil, Dr Mamdouh G. Salameh.
In a short paper that I received almost immediately, he told me everything about that subject that I or anybody else needs to know in order to hold their own in any seminar on the face of the earth. Among other comments, his paper features the following: “If Saudi Arabia is floating on a sea of oil, Iraq is floating on a Pacific Ocean of that commodity”. This is a very important piece of information, and I consider it amazing that it escaped my attention for so many years, or perhaps decades, because my book on oil was published in l980, and it contained no mention of that state of affairs. Dr Salameh also provided some statistics which brought up to date the materials in his very informative book ‘Over a Barrel’ (2004).
When I read the sentence given above, I thought back to the discussion following my lecture at the Ecole Normale Superieure (Paris) in 2008, as well as the statement about the war in Iraq made by Alan Greenspan in his book ‘The Age of Turbulence’ (2007). Dr Greenspan stated flatly that the war in Iraq was initially about oil, and in my lecture I contended that if anyone knows anything useful about the background to what was taking place in Iraq it should be the former head of the U.S. Central Bank, because in addition to being very smart, he was privy to some of the best scientific and economics information in the world, and even more important the most knowledgeable gossip.
The thing to be especially appreciated is that while a war to obtain the few buckets of oil dredged from the waters near Denmark could be described as meaningless and grotesque, access to a ‘Pacific Ocean of oil’ might seem to even a few half-baked decision makers as well worth a war or two, I’m thinking of course of someone like the former Prime Minister of England, Mr Tony Blair.
There are many numbers being circulated about the amount of oil that could be produced in Iraq in the present decade. The largest that I have seen is 12 million barrels per day (= 12 mb/d), about 2020 , and the smallest (7 mb/d) at that time. This is hardly the place for a discussion of reserve-production ratios, but given the reserve figures provided by Dr Salameh for Iraq’s oil (330 billion barrels, to include “semi-proved” and “probable” resources), the actual oil production of that country might eventually be capable of matching the mythical future oil production of Saudi Arabia that we still hear a great deal about. This point is crucial, and will be extended in the lecture that I give in Paris late next month. Something else that should be noted is that for most if not all of the oil producing countries in the Middle East, the difference between production and exports is bound to increase due to increases in domestic consumption.
Many years ago I polished my brass, and shined my shoes, and left my barracks at Fort Belvoir (Virginia) to visit the Pentagon (in Washington, DC), where I was interviewed in response to the application I had submitted to attend Officers Candidate School. I was, quite luckily, rejected, just as (some years later) I was equally fortunate to be expelled (i.e. ‘boarded out’) from Infantry Leadership School at Fort Ord (California) on the final day of the course. In any event, of late I have thought about making the kind of cost-benefit calculation that important people might have someday asked me to carry out if I had been able to impress the gentlemen examining me at the magnificent Pentagon, or for that matter in the shabby structure only a few miles from the superb beach and people-watching at Carmel (California).
In the document that Dr Salameh sent me, he says that without the war in Iraq, the price of oil today might be $40-50/b instead of $75/b. The issue then becomes would the price of oil – which began a sustainable increase about 2003 – have experienced the dramatic escalation in 2008, when the oil price topped out at just over $147/b.
This is hardly the place to give a long-winded answer, since it might involve a little algebra, but I recall being told on several occasions just after the turn of the century, that the oil ‘Majors’ believed that an oil price of about $23/b was likely, and in addition tolerable, while OPEC was calmly intent on reaching the upper limit of a desired price range of $22-28/b. (Remember that shortly before the end of the century, the oil price was almost down to $10/b.) An oil price that steadily moved in small increments to or toward $40-50/b might therefore (ex-ante) have been wish fulfilment for everybody on the supply side of the oil market, which for some rather abstract reasons suggest to me suggests that a price of $147 could have been avoided!
Moreover, there would have been no widely quoted and disturbing discussions of the future oil price by prestigious observers. In those discussions, the price of $147 led to conjecture about a possible oil price of $200/b (or higher), which was interpreted by some movers and shakers – particularly in the financial markets – as a prelude to the end of the world.
That leads to a theme I intend to discuss at some length in the next edition of my energy economics textbook (2007). I am speaking of whether the partial economic and financial market meltdown of 2008 would have taken place without the sustained oil price rise that began late in 2007, and accelerated in 2008. My answer is probably not, because that price escalation appears to me to have provided a cost increment (or impulse) that led to an economic downturn becoming a disaster for many individuals.
Allow me to briefly elaborate on some of the above discussion. To begin, the cost of the war in Iraq is far greater than usually cited, which amounts to hundreds of billions of dollars. If correctly evaluated, it may turn out to be in the trillions, because had the Iraqi oil industry been allowed to peacefully develop, they might have the capacity to produce e.g. 6-7 mb/d of oil now, and in addition galvanized the ambition to eventually increase that capacity to 10-12 mb/d. Among other things this would have facilitated the installation of the new energy systems/structures that will absolutely and unconditionally be required in some of the largest energy consuming countries: energy systems in which renewables and alternatives, and additional nuclear, play a prominent role.
Instead, as alluded to earlier, in the cost-benefit analyses that were almost certainly made in the Pentagon and CIA before the second Gulf War, and which probably used ex-post costs and benefits from the first Gulf War as a datum, it was erroneously calculated that certain elements in the global oil picture could be altered on the cheap. This is not the kind of mistake that should be encouraged before future conflict situations, or the consideration of such situations.
Dr Salameh believes that political and economic instability will likely prevent an increase in Iraqi oil output from the present 2.50 mb/d to maybe 8-10 mb/d by the end of the decade. I know only a modest amount about instability in that country, but after reading a brilliant article by Zaid Al-Ali (2010), I can only conclude that there is little or no cause for optimism. What is happening in that country is an extreme version of Murphy’s Law, which in this case not only turns on everything going wrong that can go wrong, but at an intensive pace.
I have made it clear in my work that – ceteris paribus – I consider OPEC as the most important factor in determining the future oil price. If I am correct, and the OPEC directorate believes that more money is better for their countries than less money, then it hardly makes any difference (in the short run) what individual OPEC countries are capable of producing. As you learned in your courses in mathematical economics, an absolute key factor for determining the market price in e.g. the (oligopolistic) oil market is aggregate production, and after thirty years of playing games, OPEC directors are ready and able to confront that problem in an optimal manner.
By. Professor Ferdinand E. Banks
Al-Ali, Zaid (2010). Iraq’s dangerous and depressing reality. (www.OilPrice.Com), 28 August.
Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. Singapore, London, and New York: World Scientific (New edition, 2011).
____. (2008). The sum of many hopes and fears about the oil resources of the Middle
East. Lecture given at the Ecole Normale Superieure (Paris) and The Asian Institute of Technology (Bangkok, Thailand).
Greenspan, Alan (2007). The Age of Turbulence. London: Penguin Books.
Salameh, Mamdouh G. (2010) ‘Some thoughts on Iraq’s oil potential’. (Stencil).
____. (2004). Over a Barrel. Beirut: Joseph D. Raidy.