All About The Oil

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Got Grease? A worker tends an aging pipeline near Baghdad

Eleven Iraqi exiles, as well dressed as they are well connected, flew into Washington late last month for a private two-day meeting at a nondescript downtown hotel. The Iraqis — engineers and economists invited by U.S. officials and intimately familiar with their country's oil industry — spoke in English, not Arabic, for the benefit of American observers. Most of the Iraqis insisted on keeping their identities secret to avoid retaliation from Baghdad. But there was no mystery as to their purpose: the men had gathered to prepare for the struggle over Iraq's oil riches that will start the day U.S. forces drive Saddam Hussein from power.

Iraq's proven oil reserves are conservatively estimated at 112 billion bbl. That's nearly five times larger than those of the U.S. and second only to Saudi Arabia's 262 billion. The Iraqi reserves could cover current U.S. imports for almost a century. Iraq has an additional 220 billion bbl. in probable deposits yet to be explored. All of that oil belongs to a regime that soon may not exist. So even though the U.S. confrontation with Saddam is about much more than oil, it's natural that Washington — and its allies and rivals as well as the people who will run Iraq in the future — are beginning to eye a division of the spoils.

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But what is shaping up as one of the greatest black-gold rushes in a generation comes with a few big catches. First, billions of dollars will be required to repair Iraqi oil installations hobbled by more than a decade of neglect. And that's assuming Saddam doesn't torch and otherwise sabotage the wells, as he did in Kuwait at the end of the Gulf War. Tens of billions more will be needed to then develop Iraq's vast untapped oil fields.

Those costs aren't likely to stop global oil companies from rushing to Iraq on the heels of the U.S. Army. But they will need to be patient. Fadhil Chalabi, a former Secretary General of the Organization of Petroleum Exporting Countries and a member of the Iraqi exile group that met in Washington, tells TIME that it could take five years or more before Iraq can boost its output above levels first achieved more than two decades ago. And it will require the participation of foreign investors eager to repatriate profits from an Iraq mired in poverty and in desperate need of capital. "Rebuilding the oil industry is the only way to finance Iraq's return to democracy and some sort of prosperity," Chalabi says, "and it must be done to benefit the Iraqi people."

The closed-door meeting in Washington comes amid a frenzy of war preparations that has helped drive oil prices above $35 per bbl., from $20 a year ago. A one-third cutback in petroleum production by Venezuela, beset by a political crisis, has contributed to the price increase, leaving the U.S. more dependent on Middle Eastern crude. Americans are also weathering an exceptionally cold winter, which is boosting demand for heating oil. At the gas pump, the average price of regular unleaded gasoline is $1.53 per gal., up 43 from the price 12 months ago and 11 just since Jan. 1. To make matters worse, U.S. commercial oil stocks are near their lowest levels ever. As war seems increasingly likely, some major questions loom:

How High Could Oil Prices Go?
That depends on how long the fighting lasts and how much damage Iraq's oil fields sustain. Even if a U.S. battlefield victory comes in just a few weeks — and there is no major sabotage to Iraq's oil fields — the country's production of 2.8 million bbl. a day is likely to shut down, perhaps for as long as three months. The oil fields will have to be checked for mines and other hazards before local workers and foreign experts can get down to business.

On the plus side, Saudi Arabia, with 2.5 million bbl. a day in spare capacity, has promised to make up part of Iraq's shortfall. The U.S., Europe and the major industrialized countries of Asia also have access to substantial oil stocks to help them weather the likely drought. President Bush has given orders to top off America's 700 million — bbl. Strategic Petroleum Reserve — enough oil to meet U.S. needs for 36 days. That process is about 85% complete. The most probable scenario, according to a study by the Center for Strategic and International Studies, a research institute in Washington, has oil prices running up a few dollars, to about $36 per bbl. As Saudi Prince Alwaleed bin Talal al-Saud, one of the world's leading stock-market investors, tells TIME, "Oil prices could shoot up initially not because there is a shortage but because of the perception there will be one."

But within a few months, with the prospect that Iraqi crude will start to flow again, prices might fall to about $25. By summer, the market could face a glut — and $20 crude. Moreover, says the Institute of Directors, a British employers group, a short war would actually be better for the global economy than the uncertainty and higher oil prices that would hang over it if war continues to be merely a possibility. For the U.S. economy, the study says, a war that resulted in lower oil prices would generate 2003 growth of nearly 3%, compared with the 2% currently forecast by many economists.

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