April 10, 2003 Inquiry & Analysis Series No. 131

The War in Iraq and the Future of OPEC

April 10, 2003 | By Dr. Nimrod Raphaeli*
Iraq | Inquiry & Analysis Series No. 131

The Organization of Petroleum Exporting Countries (OPEC) is an international cartel of eleven developing countries which rely heavily on oil revenues as their main source of income. Members of OPEC include Algeria, Indonesia, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Iraq was a founding member of OPEC but was expelled from the organization following its occupation of Kuwait in 1990. It has since remained outside the quota system under which OPEC determines the size of production of its individual members. It is precisely the yet undetermined role, if any, that a post-Saddam Iraq will play in OPEC's affairs that has been a matter of great concern to the Saudi government. The Saudis fear that the United States, exercising its influence on the future government of Iraq, will seek to destroy OPEC. This is hardly an idle thought since Iraq has 11 percent of the world's confirmed oil reserves and, as such, it is second only to Saudi Arabia in terms of its ability to play a key role in the international oil market. There are 2,000 oil producing wells in the southern, eastern, and northern parts of Iraq which produce 2.5 million barrels per day (b/d) of oil. The real production capacity of these wells is estimated at 8.2 million b/d. Iraq also owns 12 oil refineries with a refining capacity of 677,000 b/d.[1]

Under the title "Can OPEC Be Destroyed?" the Saudi daily Okaz[2]wrote that the U.S. believes that, by reducing the strategic importance of Saudi Arabia in the oil market, it could cause oil prices to tumble. Iraq is the only producer that is capable of competing with Saudi production in the future. For this reason, the Saudi daily expressed the concern that the U.S. might immediately spend billions of dollars to raise Iraqi oil production to the Saudi production level, or even higher. If, "God forbid," OPEC would collapse as a result of the rapidly decreasing oil prices, such an event, says the paper, would "greatly harm the economies of countries which depend heavily on oil revenues as their main sources of income." The decline in revenues would cause "financial, economic, and social problems… The Kingdom [of Saudi Arabia], Iran, the Gulf countries, and also Venezuela and Russia, will be [the main] countries harmed." Egypt is equally concerned that Iraq could become a major exporter of natural gas, which would be in direct competition with Egyptian exports to such markets as Jordan, Syria, and Turkey.[3]

For Saudi Arabia, whose oil revenues constitute about 80 percent of its total revenues, the implications of such a scenario can hardly be exaggerated. As an exporter of 7.5 million b/d, a fluctuation of $1 per barrel would translate into an annualized income or loss of about $2.7 billion.

The Iraqi opposition in exile is also fueling the concerns of the Saudi and other Middle Eastern countries. Fifteen former Iraqi experts in the oil sector who met in London over the weekend of April 5-6 2003 suggested that Iraq should "end the state monopoly in the oil sector." A Kurdish member at the meeting, Dara Al-Attar, declared that Iraq will become a federal state whose oil economy will be directed in a manner that would meet the needs of such a state.

While immediately prior to the war Iraq was producing approximately 2 million b/d, Al-Attar said Iraq will demand to return to its pre-Gulf war quota of 3.2 million b/d. Should we decide to go beyond that ceiling, Attar added, "our national interest will predominate." Our objective, he concluded, is to reach a production of 6 million b/d within the next 6-8 years.[4]Such levels of production will require OPEC members to either reduce their own shares or refuse Iraq's demand to increase its own production. Under these circumstances, Iraq might opt to leave OPEC.[5]

Meanwhile, and as a result of these potential developments, OPEC is reconsidering the quota system which may need to be revised. Experts in OPEC are also considering the lowering of the current price range between the floor and ceiling of $22-28 per barrel to $18-20 per barrel.[6]

There are two remaining issues that would affect the level of oil production in Iraq. First, is the status of oil exploration/production contracts that Saddam Hussein's regime signed with various European oil companies, mainly French and Russian, and whether the post-Saddam government would honor them. Second, is the attitude of the new government regarding foreign investments by international oil companies. Iraq has traditionally protected its oil industry by keeping it under strict national control. It is yet to be seen whether investments by international oil concerns would be welcomed.[7]

* Dr. Nimrod Raphaeli is Senior Analyst of MEMRI's Middle East Economic Studies Program.

[1]Al-Watan (Saudi daily), April 7, 2003.

[2]Okaz (Saudi Arabia), March 27, 2003.

[3]Al-Sharq Al-Awsat (London), April 7, 2003.

[4]Al-Jazirah (Saudi daily), April 7, 2003.

[5]Al-Sharq Al-Awsat (London), April 7, 2003.

[6]Al-Watan (Saudi daily), April 7, 2003.

[7]Al-Hayat (London), April 4, 2003.

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