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Friday, March 18, 2005

Wolfowitz's Plot to Destroy OPEC
And Why it was always Ridiculous

Joe Conason presents

http://www.salon.com/src/pass/gateway/index.html?

http://news.bbc.co.uk/2/hi/programmes/newsnight/4354269.stm

It is a story that also has a bearing on Paul Wolfowitz's bid to become chairman of the World Bank. I have some questions for him. Does he want to reduce the Arabs to poverty? Is he hostile to the very existence of OPEC and of producer cooperatives in primary commodities? Does he favor the use of warfare by states to permit their corporations to take over public energy resources in the Global South? Are his economic policies going to be rooted in a desire to further the interests of the Likud and other rightwing parties in the Global South?

As Palast tells the story, the Neoconservatives (presumably Wolfowitz, Perle and Feith) and the Department of Defense were dedicated to privatizing the Iraqi petroleum industry as a key plank of their Iraq project. They hoped that Iraq's privately-owned (presumably by American petroleum corporations) petroleum industry would secede from the Organization of Petroleum Exporting Countries (OPEC) and would pump large amounts of petroleum, refusing to stay within the bounds of the Iraq OPEC quota. By setting quotas for members, OPEC attempts to keep the price of petroleum from falling too far or from oscillating too wildly.

That there was a cult of privatization at the Pentagon has never been in doubt. Iraq has been a socialist country since at least 1968 (and had elements of socialism in the period of military rule 1958-1968). Most major industries were publicly owned. Moreover, the Iraqi population liked it that way. Opinion polls show that 80% of Iraqis think the purpose of a government is to take care of people.

Paul Bremer, the second US civil administrator of Iraq is a fanatical laissez-fairiste. The privatizers would set up private corporations to sell you creek water and oxygen if they could get away with it. In a BBC interview, Jay Garner alleged that the Department of Defense dissolved the Iraqi army and sent it home, causing all of us no end of trouble, because they were afraid that retaining a large Baath institution like that would form an obstacle to radical privatization. Bremer wanted to allow foreign companies to buy any firm in Iraq and to be able to expatriate profits immediately. (The abolition of currency regulations, advocated by Washington Consensus free marketeers, contributed to the meltdown of the East Asian economies in 1997; Malaysia escaped devastation by thumbing its nose at the privatizers and slapping on currency controls. It turns out that if there are no regulations about currency transfers, speculators take advantage of it; Surprise!)

Obviously, the real prize in privatization would be the petroleum industry. No other state-owned Iraqi industries are worth much, and will be difficult to sell to private owners because they are bloated bureaucracies and inefficient.

The prospect of the Iraqi petroleum going into foreign hands, however, impelled many Iraqis to begin sabotaging the pipelines, or to support the saboteurs. Palast reports,
Mr Aljibury, once Ronald Reagan's "back-channel" to Saddam, claims that plans to sell off Iraq's oil, pushed by the US-installed Governing Council in 2003, helped instigate the insurgency and attacks on US and British occupying forces. "Insurgents used this, saying, 'Look, you're losing your country, you're losing your resources to a bunch of wealthy billionaires who want to take you over and make your life miserable,'" said Mr Aljibury from his home near San Francisco. "We saw an increase in the bombing of oil facilities, pipelines, built on the premise that privatisation is coming."
Iraq should be able to produce 3 million barrels a day, but it has often only done a million or a million and a half because of sabotage, reducing the Iraqi government income from petroleum to only $10 billion or so a year, when it could have been $20 billion or more.

According to Palast, it was the Coalition Provisional Authority officials from a Big Oil background, like Philip Carroll, the former CEO of Shell Oil USA, who told Bremer "No!"

The US petroleum companies haven't been interested in owning Middle Eastern petroleum for decades. Most Middle Eastern oil producers nationalized their industries in the 1970s. The US companies moved into refining and distribution, which is plenty profitable. Trying to own the oil fields had long caused them a lot of trouble. The attempt of Prime Minister Mohammad Mossaddegh to nationalize Iranian oil in 1951-1953 had led to a US/UK boycott of Iranian petroleum and ultimately a CIA-backed coup that ended the last democratically elected government in Iran in 1953. Since that time, Middle Eastern peoples had become much more politically and socially mobilized, and popular demands for ownership of national resources became irresistible.

(Max Boot, who thinks Middle Easterners are just Filipino peasant villagers circa 1902--poor, illiterate, unconnected and politically naive--exemplifies the basic Neocon fallacy. The Neocons haven't even caught up to the 1950s or read Karl Deutsch on the social mobilization of the Global South. People can't be occupied so easily once they are urbanized, industrialized, literate, connected by modern communications, and politically aware. This is why Boot and Wolfowitz did not anticipate a long-term guerrilla war in Iraq, or how savvy and effective it would be. They really think they are Lord Curzon dealing with backward WOGs).

So the Neoconservative/ Department of Defense plan to privatize the petroleum industry was swimming against history, and proved impossible to implement because a) the Iraqis wouldn't put up with it and b) even US Big Oil could see that it was a disaster waiting to happen.

The other thing wrong with the Wolfowitz/Perle/Feith plan to destroy OPEC via Iraq is that it cannot be done. If they thought it could be done, they are ignorant of the petroleum industry and also of basic economics. About 80 million barrels of petroleum are produced in the world each day (it fluctuates, so this figure is inexact). The Saudis can produce as much as 11 million of that (they are expanding capacity now to 12 or 13). The Saudis can, however, get along with only producing 7 million barrels a day (maybe even less at today's prices). Most oil producers use a lot of their own petroleum. The US, Russia, China, etc., produce petroleum but then they consume a lot of it themselves. The Gulf producers, in contrast, have small populations and cannot absorb much petroleum use, so they are the ones who can export in large amounts.

The Saudis are now and for the foreseeable future the major swing producer. It takes them three days to gear up production from 7 million barrels a day to 11, or to ratchet things back down. They can put 5 million of the approximately 80 million on the market or take it off, virtually at the stroke of a pen. Between this ability and their influence in OPEC, the Saudis have some ability to influence (but by no means control) petroleum prices.

Iraq can only produce about 2.5 to 3 million barrels a day now if there is no sabotage. With the investment of billions and lots of security and rebuilding, they might get that up to 5 million a day within 5 years. It would take them 15 to 20 years to have a capacity similar to that of Saudi Arabia. In the meantime, OPEC countries will probably increase their capacity by 20 million barrels a day, completely offsetting any Iraq increases. Moreover, Iraq is a real country, with a population of 25 million and many industries, and Iraq will use a lot of its own petroleum. What it has available for export will be only a portion. Iraq will never be the kind of swing producer that Saudi Arabia is.

There are already a lot of countries that are not in OPEC and pay no attention to quotas. They haven't destroyed OPEC, and one more (Iraq) wouldn't, either. The cartel effect of OPEC is simply not that great, and oil prices have fluctuated dramatically every decade since it was formed. OPEC has mostly failed even to dramatically influence, much less control prices. In 2004-5, Bush administration policies in Iraq plus a rise in demand from China and India plus strikes and other problems in places like Nigeria and Venezuela put the petroleum price up to as much as $55 a barrel, whereas OPEC's target for many years was $25 a barrel. The Neocons by their Iraq war have managed to double OPEC's income, beyond even what OPEC wanted!

So Iraqi petroleum cannot destroy OPEC for the foreseeable future, even if whoever was in charge of it wanted too. In fact, there is every reason for any Iraqi government to want to keep petroleum publicly owned, and to cooperate with OPEC in attempting to smoothe out extremes in the price cycle.

Primary commodities suffer from big swings in prices. You see this in coffee and cotton, too. There are booms and then busts and then booms. If you are a producer, this rollercoaster ride is inconvenient and could bankrupt you some years. High prices bring in more money but also bring lots of new competitors who can only compete when the prices are high because of natural disadvantages. Really low prices are devastating. So coffee growers, petroleum producers, and other primary commodity producers often form cartels in an attempt, not so much to keep prices high, as to keep them from jumping all around. With the exception of the DeBeers diamond racket in South Africa, most cartels have only a minor effect on price cycles.

Now the Neocons are all becoming Greens and arguing for solar or other forms of power in order to cut down on US oil dependence. This is code for making sure the Arabs cannot use petroleum to influence the US in the Arab-Israeli dispute. I'm all for getting off the carbon-based treadmill. But petroleum has other uses than providing energy, especially petrochemicals, and Arab producers are going to be rich off such uses for decades or centuries.

The story Palast tells is one of crackpotism run wild, and it would be more than tragic if it is what dragged us into the Iraq quagmire.

posted by Juan @ 3/18/2005 06:30:00 PM