by Greg Palast
Have we peaked? Worldwide oil reserves continue to rise even faster than America and China can burn it. Since 1980, reserves, despite our binge-guzzling, have risen from 648 billion to 1.2 trillion barrels. Yet, weirdly, despite the rising flood of discovered crude, its price quadrupled between 2001 and 2005. Supply choked, yet there’s no peak in sight. Behind this slow in the flow of crude:
This bit of bother in OPEC’s second-largest reserve (Iraq);
Putin’s cutting off financing to, then his seizing of, Russian producer Yukos Oil, reducing its output;
U.S.-promoted sabotage of oil piping, loading and refining systems in Venezuela; and, not least of all,
the Saudis sitting on their spigots.
The oil squeeze tightened after the Bush Administration, beginning with the energy bill of 2001, abandoned conservation and encouraged a monstrous jump of two million barrels a day in U.S. oil consumption.
So please don’t slander Mother Earth and say she’s run out of oil when it’s man-made mischief to blame. Evil, not geology, has a chokehold on energy; nature is ready to give us crude at $12 a barrel where it was just a few short years ago.
Mr. 5% and the Red-Lining of Iraq’s Reserves
World oil production today stands at more than twice the 15-billion-a-year maximum projected by Shell Oil in 1956—and reserves are climbing at a faster clip yet.
That leaves the question, Why this war? Did Dick Cheney send us in to seize the last dwindling supplies? Unlikely. Our world’s petroleum reserves have doubled in just twenty-five years—and it is in Shell’s and the rest of the industry’s interest that this doubling doesn’t happen again. The neo-cons were hell-bent on raising Iraq’s oil production. Big Oil’s interest was in suppressing production, that is, keeping Iraq to its OPEC quota or less. This raises the question, Did the petroleum industry, which had a direct, if hidden, hand, in promoting invasion, cheerlead for a takeover of Iraq to prevent overproduction? It wouldn’t be the first time.
If oil is what we’re looking for, there are, indeed, extra helpings in Iraq. On paper, Iraq, at 112 billion proven barrels, has the second largest reserves in OPEC after Saudi Arabia. That does not make Saudi Arabia happy. Even more important is that Iraq has fewer than three thousand operating wells…compared to one million in Texas. That makes the Saudis even unhappier. It would take a decade or more, but start drilling in Iraq and its reserves will about double, bringing it within gallons of Saudi Arabia’s own gargantuan pool. Should Iraq drill on that scale, the total, when combined with the Saudis’, will drown the oil market. That wouldn’t make the Texans too happy either.
So Fadhil Chalabi’s plan for Iraq to pump 12 million barrels a day, a million more than Saudi Arabia, is not, to use Bob Ebel’s terminology, “ridiculous” from a raw resource view, it is ridiculous politically. It would never be permitted. An international industry policy of suppressing Iraqi oil production has been in place since 1927.
We need again to visit that imp called “history.”
It began with a character known as “Mr. 5%”—Calouste Gulbenkian—who, in 1925, slicked King Faisal, neophyte ruler of the country recently created by Churchill, into giving Gulbenkian’s “Iraq Petroleum Company” (IPC) exclusive rights to all of Iraq’s oil. Gulbenkian flipped 95% of his concession to a combine of western oil giants: Anglo-Persian, Royal Dutch Shell, CFP of France, and the Standard Oil trust companies (now ExxonMobil and its “sisters.”) The remaining slice Calouste kept for himself—hence, “Mr. 5%.”
The oil majors had a better use for Iraq’s oil than drilling it—not drilling it. The oil bigs had bought Iraq’s concession to seal it up and keep it off the market. To please his buyers’ wishes, Mr. 5% spread out a big map of the Middle East on the floor of a hotel room in Belgium and drew a thick red line around the gulf oil fields, centered on Iraq. All the oil company executives, gathered in the hotel room, signed their name on the red line—vowing not to drill, except as a group, within the red-lined zone. No one, therefore, had an incentive to cheat and take red-lined oil. All of Iraq’s oil, sequestered by all, was locked in, and all signers would enjoy a lift in worldwide prices.
Anglo-Persian company, now British Petroleum (BP), would pump almost all its oil, reasonably, from Persia (Iran). Later, the Standard Oil combine, renamed the Arabian-American Oil Company (Aramco), would limit almost all its drilling to Saudi Arabia. Anglo-Persian (BP) had begun pulling oil from Kirkuk, Iraq, in 1927 and, in accordance with the Red-Line Agreement, shared its Kirkuk and Basra fields with its IPC group—and drilled no more.
The following was written three decades ago:
Although its original concession of March 14, 1925, covered all of Iraq, the Iraq Petroleum Co., under the ownership of BP (23.75%), Shell (23.75%), CFP [of France](23.75%), Exxon (11.85%), Mobil (11.85%), and [Calouste] Gulbenkian (5.0%), limited its production to fields constituting only one-half of 1 percent of the country’s total area. During the Great Depression, the world was awash with oil and greater output from Iraq would simply have driven the price down to even lower levels.11
Plus ça change…
When the British Foreign Office fretted that locking up oil would stoke local nationalist anger, BP-IPC agreed privately to pretend to drill lots of wells, but make them absurdly shallow and place them where, wrote a company manager, “there was no danger of striking oil.”
This systematic suppression of Iraq’s production, begun in 1927, has never ceased. In the early 1960s, Iraq’s frustration with the British-led oil consortium’s failure to pump pushed the nation to cancel the BP-Shell-Exxon concession and seize the oil fields. Britain was ready to strangle Baghdad, but a cooler, wiser man in the White House, John F. Kennedy, told the Brits to back off. President Kennedy refused to call Iraq’s seizure an “expropriation” akin to Castro’s seizure of U.S.-owned banana plantations. Kennedy’s view was that Anglo-American companies had it coming to them because they had refused to honor their legal commitment to drill.
But the freedom Kennedy offered the Iraqis to drill their own oil to the maximum was swiftly taken away from them by their Arab brethren. The OPEC cartel, controlled by Saudi Arabia, capped Iraq’s production at a sum equal to Iran’s, though the Iranian reserves are far smaller than Iraq’s. The excuse for this quota equality between Iraq and Iran was to prevent war between them. It didn’t.
To keep Iraq’s Ba’athists from complaining about the limits, Saudi Arabia simply bought off the leaders by funding Saddam’s war against Iran and giving the dictator $7 billion for his “Islamic bomb” program.
In 1974, a U.S. politician broke the omerta over the suppression of Iraq’s oil production. It was during the Arab oil embargo that Senator Edmund Muskie revealed a secret intelligence report of “fantastic” reserves of oil in Iraq undeveloped because U.S. oil companies refused to add pipeline capacity. Muskie, who’d just lost a bid for the Presidency, was dubbed a “loser” and ignored.
The Iranian bombing of the Basra fields (1980–88) put a new kink in Iraq’s oil production.
Iraq’s frustration under production limits explodes periodically. In August 1990, Kuwait’s craven siphoning of border-land oil fields jointly owned with Iraq gave Saddam the excuse to take Kuwait’s share. Here was Saddam’s opportunity to increase Iraq’s OPEC quota by taking Kuwait’s (most assuredly not approved by the U.S.). Saddam’s plan backfired. The Basra oil fields not crippled by Iran were demolished in 1991 by American B-52s.
Saddam’s petro-military overreach into Kuwait gave the West the authority for a more direct oil suppression method called the “Sanctions” program, later changed to “Oil for Food.” Now we get to the real reason for the U.N. embargo on Iraqi oil exports. According to the official U.S. position:
Sanctions were critical to preventing Iraq from acquiring equipment that could be used to reconstitute banned weapons of mass destruction (WMD) programs.12
* * *
A History of Oil in Iraq
Suppressing It, Not Pump
ing It
1925–28 “Mr. 5%” sells his monopoly on Iraq’s oil to British Petroleum and Exxon, who sign a “Red-Line Agreement” vowing not to compete by drilling independently in Iraq.
1948 Red-Line Agreement ended, replaced by oil combines’ “dog in the manger” strategy—taking control of fields, then capping production—drilling shallow holes where “there was no danger of striking oil.”
1961 OPEC, founded the year before, places quotas on Iraq’s exports equal to Iran’s, locking in suppression policy.
1980–88 Iran-Iraq War. Iran destroys Basra fields. Iraq cannot meet OPEC quota.
1991 Desert Storm. Anglo-American bombings cut production.
1991–2003 United Nations Oil embargo (zero legal exports) followed by Oil-for-Food Program limiting Iraqi sales to 2 million barrels a day.
2003–? “Insurgents” sabotage Iraq’s pipelines and infrastructure.
2004 Options for Iraqi Oil. The secret plan adopted by U.S. State Department overturns Pentagon proposal to massively increase oil production. State Department plan, adopted by government of occupied Iraq, limits state oil company to OPEC quotas.
* * *
How odd. If cutting Saddam’s allowance was the purpose, then sanctions, limiting oil exports, was a very suspect method indeed. The nature of the oil market (a cartel) is such that the elimination of two million barrels a day increased Saddam’s revenue. One might conclude that sanctions were less about WMD and more about EPS (earnings per share) of oil sellers.
In other words, there is nothing new under the desert sun. Today’s fight over how much of Iraq’s oil to produce (or suppress) simply extends into this century the last century’s pump-or-control battles.
In sum, Big Oil, whether in European or Arab-OPEC dress, has done its damned best to keep Iraq’s oil buried deep in the ground to keep prices high in the air.
Iraq has 74 known fields and only 15 in production; 526 known “structures” (oil-speak for “pools of oil”), only 125 drilled. And they won’t be drilled, not unless Iraq says, “Mother, may I?” to Saudi Arabia, or, as the Baker/CFR paper says, “Saudi Arabia may punish Iraq.” And believe me, Iraq wouldn’t want that.
The decision to expand production has, for now, been kept out of Iraqi’s hands by the latest method of suppressing Iraq’s oil flow—the 2003 invasion and resistance to invasion. And it has been darn effective. Iraq’s output in 2003, 2004 and 2005 was less than produced under the restrictive Oil-for-Food Program. Whether by design or happenstance, this decline in output has resulted in tripling the profits of the five U.S. oil majors to $89 billion for a single year, 2005, compared to pre-invasion 2002.
That suggests an interesting arithmetic equation. Big Oil’s profits are up $89 billion a year in the same period the oil industry boosted contributions to Mr. Bush’s reelection campaign to roughly $40 million. That would make our president “Mr. 0.05%.”
Saddam Does the Jerk: Why He Had to Go
Every cartel needs one producer to stifle production, and that was Iraq’s sorry role, under Mr. 5%, the IOCs and OPEC, for nearly a century. The last thing the oil industry wanted from Iraq in 2001 was a lot more oil. Therefore, we can rule out the West’s desire for Iraq’s oil as the decisive motive to invade Iraq. Neither Saddam’s affection for euro currency nor panic over oil peaking ruffled the international oil industry. What, then, made Saddam, so easy to hug in the 1980s, unbearable in the 1990s?
Saddam had to go, but why?
They held meetings about it. Beginning just after Bush’s Florida victory in December 2000, the shepherds of the planet’s assets got together to plan our energy future under the weighty aegis of the Joint Task Force on Petroleum of the James A. Baker III Institute and the Council on Foreign Relations. The master plan makers included the Master Race of lobbyists expert at turning grasping self-serving industry demands dripping with give-me-more greed into selfless policy-speak advice for the new President. There was Bremer’s and Kissinger’s partner, Mack McLarty, CEO of Kissinger McLarty Associates; John Manzoni of British Petroleum; Luis Giusti, former CEO of the Venezuelan state oil company (until Chávez kicked him out); Ken Lay of Enron (pre-indictment); Philip Verleger of the National Petroleum Council, and other movers and shakers crucial to such bipartisan multi-continental group gropes—all chaired by Dr. Edward Morse, our man from Hess Oil Trading.
The final report detailed Saddam’s crimes. Gassing Kurds and Iranians? No. James A. Baker was the Reagan Chief of Staff when the U.S. provided Saddam the intelligence to better target his chemical weapons. Weapons of Mass Destruction? Not since this crowd stopped selling him the components.
In the sanitary words of the Council on Foreign Relations’ report (written by Amy Jaffe), Saddam’s problem was that he was a “swinger”:
Tight markets have increased U.S. and global vulnerability to disruption and provided adversaries undue potential influence over the price of oil. Iraq has become a key “swing” producer, posing a difficult situation for the U.S. government.
Now hold on a minute: Why is our government in a “difficult” position if Iraq is a “swing producer” of oil?
The answer was that Saddam was jerking the oil market up and down. One week, without notice, the man in the moustache suddenly announces he’s going to “support the Palestinian intifada” and cuts off all oil shipments. The result: Worldwide oil prices jump up. The next week, Saddam forgets about the Palestinians and pumps to the maximum allowed under the Oil-for-Food Program. The result: Oil prices suddenly dive-bomb. Up, down, up, down. Saddam was out of control.
“Control is what it’s all about,” Lapham told me. “It’s not about getting the oil, it’s about controlling oil’s price.”
Within days of Bush’s election in November 2000, the James Baker Institute issued this warning:
In a market with so little cushion to cover unexpected events, oil prices become extremely sensitive to perceived supply risks. Such a market increases the potential leverage of an otherwise lesser producer such as Iraq…
Falah Aljibury, an advisor to the Baker CFR group, put it this way: “Iraq is not stable, a wild card,” as Saddam cuts production, or suddenly boosts it, playing games with the U.N. over the Oil-for-Food Program. The tinpot despot was, almost alone, setting the weekly world price of oil and Big Oil did not care for that. In the CFR’s sober language:
Saddam is a “destabilizing influence…to the flow of oil to international markets from the Middle East.”
With Saddam out of control, jerking markets up and down, the price of controlling the price was getting just too high. Saddam drove the oil boys bonkers. For example, Saddam’s games pushed the State Department, disastrously, to launch, in April 2002, a coup d’état in Venezuela.
I was in Caracas that month for BBC. I learned from Ali Rodriguez, OPEC’s secretary general, what had panicked the U.S. into premature action against Chávez and why it failed. The OPEC chief told me that days before the coup, Libya’s Gaddafi had contacted Rodriguez to say he was preparing, with Saddam, to launch a new Arab oil embargo. The U.S. State Department had certainly learned of it. Rodriguez tipped off his old friend, Venezuela’s President Chávez, which allowed Chávez to prepare for the obvious U.S. response: a coup d’état. The plot collapsed, spectacularly, in 48 hours.
If you’re wondering why Saddam’s threat would lead to the U.S. to remove Chávez, keep in mind that Venezuela, once the top exporter to the U.S., broke the back of the 1973 Arab oil embargo by replacing the oil withdrawn by Saudi Arabia. Chávez, despised by Bush, was not likely to save Bush’s bacon by busting another embargo. Therefore, Chávez had to go immediately.
The Venezuela debacle, the failure of the coup, underscored the endlessly costly consequences of leaving Saddam in a position to rock the oil markets. Whether through his conspiracies with Libya or his games with the oil-for-food allotments, the Council on Foreign Relations concluded:
Saddam Hussein has demonstrated a willingness to threaten to use
the oil weapon to manipulate oil markets…. United States should conduct an immediate policy review toward Iraq, including military, energy, economic, and political/diplomatic assessments.
Saddam could light a match that would burn in Venezuela or Iran or Russia. This could not stand. Saddam delighted in playing cat-and-mouse with the USA and our oil majors. Unfortunately for him, he wasn’t playing with mice, but a much bigger and unforgiving breed of rodents. Saddam was asking for it. It was time for a “military assessment.”
The true motive to invade Iraq, Saddam’s “manipulation of oil markets,” was there, but not yet, in April 2001, the official excuse.
Not surprisingly, the desires of the “Project for a New American Century,” the neo-con field of dreams, of remaking Arabia, was not in the Baker Institute-CFR plan. However, the conclusion, Saddam must go, matched the neo-con’s policy demand, if for highly different reasons. The Baker-CFR panel had a limited concern: Get rid of the jerk, the guy yanking the market about.