Aleksander Kwaśniewski, president of Poland, one of the countries in the “coalition of the willing,” argued with Defense Secretary Rumsfeld that the post–World War II German model was misunderstood and was being misapplied. Rather, said Kwaśniewski, the United States should pay attention to the more recent model from Eastern Europe, where reformist wings of the former communist parties had been successfully integrated into the new political systems—an approach that had brought both cohesion and stability. Kwaśniewski’s Polish troops were welcomed into the coalition, but not his argument.15
The U.S. occupation arrived with a mélange of many ideas and analogies and lessons—ranging from a vision of a “New Middle East” to remembered film images of the joyous French tossing flowers at the U.S. soldiers liberating them from Nazi rule. Whatever their actual relevance to conditions in Iraq in 2003, these ideas nevertheless shaped the approach on the ground after the hostilities. Important realities of culture, history, and religion featured less.
The problem of inadequate troop levels was compounded by Order #2 by the Coalition Provisional Authority—“Dissolution of Entities”—which dismissed the Iraqi Army. Sending or allowing more than 400,000 soldiers, including the largely Sunni officer corps, to go home, with no jobs, no paychecks, no income to support their families, no dignity—but with weapons and growing animus to the American and British forces—was an invitation to disaster. The decision seems to have been made almost off-hand, somewhere between Washington and Baghdad, with little consideration or review. It reversed a decision made ten weeks earlier to use the Iraqi Army to help maintain order. In bluntly criticizing the policy to Bremer, one of the senior U.S. officers used an expletive. Rather than responding to the substance of the objection, Bremer said that he would not tolerate such language in his office and ordered the officer to leave the room.
The immediate effect of the army’s dissolution was “incendiary,” and the consequences would prove enormous. A plan was formulated to create a new military, but the ambition was pathetically small—initially just 7,000 troops, later lifted to 40,000. A separate oil police had guarded the entire petroleum sector. That too was dissolved, adding to the risks for the workers in the oil industry and leaving the oil system even more vulnerable to pillage and sabotage. 16
RAMPANT LOOTING
Looting seemed to have been endemic in Iraq whenever authority broke down, going back to the 1958 revolution. Widespread looting had broken out in the aftermath of the 1991 Gulf War. Yet that risk too seems to have gone largely unnoted in the planning for the postwar situation. In 2003 looting and vandalism started immediately, and on a massive scale. There was no Iraqi Army to help prevent the looting, but now a large number of disgruntled and unemployed former soldiers. When it first began, Defense Secretary Rumsfeld dismissed it with the famous phrase “Stuff happens.” But it undermined the entire economy and highlighted the immediate lack of security. Two of the three sewage plants in Baghdad were so thoroughly looted that they had to be rebuilt. Even police stations were stripped of their electric wires, phones, light fixtures, and doorknobs. The oil industry was a prime target for this stripping. For instance, all the water pumps, critical to its operation, were stolen from the giant Rumaila oil field. Only by mustering his workers with their private arms did the head of the Daura Refinery succeed in standing off an army of looters at the refinery gate.
One of the most devastating impacts resulted from the wholesale looting of the electric system, on which the whole economy depended. Vandals took down the electric wires and pulled down the transmission towers and carted their booty off to Iran or Kuwait to sell as scrap. Even the computerized control room of the power station that controlled Baghdad’s electric grid was looted. This continuing disruption hit the oil industry hard. Without electricity, many of the oil fields and the three surviving refineries simply could not operate. It also crippled the irrigation on which agriculture depended. 17
Despite the looting, in the first several months or so, the occupation seemed to be making some progress. And, such was the ingenuity of the Iraqi oil people that, even in the face of deprivation, petroleum production was being restored and was actually ahead of target. By late summer, one could detect a certain note of triumphalism in some commentaries along with a growing confidence that Iraq really did presage a “new” Middle East.
INSURGENCY AND CIVIL WAR
But the occupation was not going according to plan. Rumsfeld had called the emerging insurgents “dead-enders.” But soon the U.S. commander in Iraq was talking about “a classical guerilla-type campaign,” and one of the senior British representatives was warning that “the new threat” was “well-targeted sabotage of the infrastructure.” Unemployment was running at 60 percent. Yet this unemployment, even with all its obvious risks, was not the top economic priority. Instead U.S. officials were focused on transforming Iraq, which had a totally state-dominated economy, into a free-market state, and doing so as rapidly as possible. Meanwhile, as one American general warned, “the liberators” were coming to be seen as something else—“occupiers.”
By the autumn of 2003, a new, more difficult phase was beginning. In due course, some would call it a civil war; others, an insurgency. As events played out, it would be both—a civil war between Shia and Sunnis, and an insurgency manned by Baathists and other Sunni activists, increasingly conjoined with foreign jihadists, abetted by unemployed young men (who, for a hundred dollars or even fifty dollars, could be hired to open fire on the Americans).18
By the spring of 2004 it would become a war against the occupation. Private militias were battling each other. Foreign jihadists were infiltrating into the country. Killings and revenge killings became a daily occurrence. Roadside bombs were becoming increasingly lethal. Car bombs were going off outside restaurants and offices. The leadership of the occupation withdrew into the safety of the heavily secured Green Zone. In May 2004, Jeremy Greenstock, who had been the senior British representative in Baghdad, lamented that Bremer, as the U.S. head of the occupation, did not have a plaque on his desk that said “Security and jobs, stupid.”19
THE INDUSTRY UNDER ATTACK
The oil industry was by then under attack. The former Baath Party put high priority on sabotaging the industry in a plan it called its Political and Strategic Program for the Armed Iraqi Resistance. Pipelines were being blown up; the export line, from Iraq into Turkey and to the Mediterranean, was shut by repeated bombings. The great expectations for the rapid expansion of Iraqi output were being punctured. Increasingly, the struggle was to maintain exports, especially in the north.
With his term as oil adviser over, Phil Carroll returned to the United States in the autumn of 2003. He was succeeded by Rob McKee, who had headed exploration and production for ConocoPhillips around the world.
“From the moment I got there, I saw that we didn’t have enough people on the ground to do what needed to be done,” said McKee. “Everything was broken. There was no police, no order, no courts, no infrastructure, and lack of electricity and water. Every day was a firefight, literally and figuratively. You’d come in the morning and get word that something had been blown up or looted. And then you’d figure out how to get that fixed before you could turn back to the longer-term, bigger issues.”
On top of that were the procedures of the U.S. government. “All the bureaucracy over bidding and contracting, all that slowed things down to a crawl,” said McKee. “That was the most frustrating thing I had to deal with.”20
THE IRAQI DISRUPTION
But such was the effort that output in 2004 did come close to the prewar levels in several months but, for the year—as a result of the violence and of the economic disarray and electricity shortages—was more than 20 percent lower. Exports were often disrupted. In what could have been a disaster, two suicide bombers in a motorized dinghy came close to blowing up part of the critically important offshore oil export terminal, but the craft exploded short of its target. Naval patrols, thereafter,
were much tighter.
As the insurgency stepped up its attacks, the effect was being felt in the world oil market. “Last week’s attacks on key pipelines,” reported Petroleum Intelligence Weekly in June 2004, “have reduced exports of around 1.6 million barrels per day to zero with no immediate prospect that they will resume. While bad enough for Iraq, the export outage has left world oil markets with a tiny sliver of spare capacity concentrated in Saudi Arabia.... Global oil supplies have relatively little slack.”21
Again and again, exports were reduced or temporarily halted. In the years following the invasion, Iraqi production remained, at best, at only two thirds of capacity. It was not until 2009 that it was able, on an annual basis, to reach the prewar level of 2001, itself still considerably below the kind of potential that the country could achieve with investment. Before the war there had been high expectations about how Iraq’s growing output would contribute to stability in the world oil market. Instead Iraq’s beleaguered oil industry, producing well below its capacity, ended up contributing, on a sustained basis, to the toll of the aggregate disruption.
WHAT DID YOU LEARN?
In the autumn of 2003, when Phil Carroll, the first oil adviser, finished his tour, he stopped in Washington on his way back to Houston to visit the Pentagon. He was taken in to see Defense Secretary Rumsfeld. The secretary mainly had two questions for Carroll: “Did you enjoy it?” And, “What did you learn?”
There was not much more to the discussion than that. Carroll headed on home.
8
THE DEMAND SHOCK
On one still afternoon under an Oklahoma sun, neither a cloud nor an ounce of “volatility” was in sight. All one saw were the somnolent tanks filled with oil, hundreds of these tanks, spread over the rolling hills, some brand-new, some more than seventy years old, and some holding, inside their silver or rust-orange skins, more than half a million barrels of oil each.
Here, in a physical sense, was ground zero for the world oil price. For this was Cushing, Oklahoma, the gathering point for the light, sweet crude oil known as West Texas Intermediate—or just WTI. This was the price that one heard announced every day, as in “WTI closed today at . . .”
Cushing proclaims itself, as the sign on the main road into town says, the “Pipeline Crossroads of the World.” Through this quiet town passes the network of pipes that carry oil at the stately speed of four miles per hour from Texas and Oklahoma and New Mexico, from Louisiana and the Gulf Coast, and from Canada, too, into Cushing’s tanks. From there the oil flows onward to refineries where the crude is turned into gasoline, jet fuel, diesel, home heating oil—all the products that people actually use. But that is not what makes Cushing so significant. After all, there are other places where still more oil flows. Cushing plays a unique role in the new global oil industry because WTI is a preeminent benchmark against which other barrels are priced.
Soon after its discovery in 1912, the Cushing oil field achieved star status as “The Queen of the Oil Fields.” For a time, it produced almost 20 percent of all U.S. oil. The town of Cushing became one of the classic wild oil boomtowns of the early twentieth century, a place where, as one journalist wrote at the time, “any man with red blood gets oil fever.”1
After Cushing’s production declined, the town turned into a key petroleum pipeline junction. When the futures market started to trade oil futures in 1983, it needed a physical delivery point. Cushing , its boom days long gone, but with its network of pipelines and tank farms and blessed by its central location, was the obvious answer. As much as 1.1 million barrels per day passes in and out of Cushing—a great deal of oil in absolute terms, but equivalent to only about 6 percent of total U.S. oil consumption. That oil is the physical commodity that provides the “objective correlative” to the “paper” barrels and “electronic” barrels traded around the world.
A couple of other types of crudes are also used as markers, most notably Brent based on North Sea oil. Notwithstanding, prices for a good deal of the world’s crude oil are set against the benchmark of the WTI oil—also known as domestic sweet—sitting in those tanks in Cushing, making what is today a quiet little Oklahoma town, its fever long gone, one of the hubs for the world economy. But Cushing’s sedateness would stand in increasing contrast to the growing clamor and controversy that would be set off by the ascending price of oil in the global market. And what a clamor and controversy it was.
THE SURGE
The remarkable ascent of oil prices that began in 2004 ignited a furious argument as to whether the great surge was the result of supply and demand or of expectations and financial markets. The right answer is all of the above. The forces of supply and demand were very powerful. But over time they were amplified by the financial markets, embodying the new dynamics of oil.
The twenty-first century brought a profound reshaping of the oil industry—the “globalization of demand”—that reflected the reordering of the world economy. For decades, world consumption had been centered in the industrial countries of what was called the developed world—primarily North America, Western Europe, and Japan. These were the countries with most of the cars, most of the paved roads, and most of the world’s GDP. But, inexorably, that predominance was ebbing away with the rise of the emerging economies of the developing world and the growing impact of globalization.
Even though total world petroleum consumption grew by 25 percent between 1980 and 2000, the industrial countries were still using two thirds of total oil as the new century began. But then came the shock—the demand shock—that hit the world oil market in 2004. It propelled consumption upward, with—when combined with the aggregate disruption—a startling impact on price. It was also a shock of recognition for a new global reality. Between 2000 and 2010, world oil demand grew by 12 percent. But by now, the split between the developed and the developing world was 50–50.
As far back as 1973, it seemed that whenever an upheaval shook the world oil market, sending prices flying up, it was always some kind of “supply shock”—in other words, a disruption of the supply lines. This was true whether it was the oil embargo at the time of the 1973 October War, or the turmoil that came with the Iranian Revolution in 1978–79, or the Gulf crisis of 1990–91. The last significant demand shock had been the swiftly rising consumption in Europe and Japan at the end of the 1960s and early 1970s that had tightened the global supply-demand balance, setting the stage for the 1973 oil embargo. But that was a long time ago.
The new demand shock was powered by what was the best global economic performance in a generation and the shift toward the emerging market nations as the engines of global economic growth. Yet this had taken the world by surprise.
As 2004 began, the consensus expectation was still centered on what OPEC had taken as its $22-to-$28 price band. Market projections were for standard growth in consumption. In February 2004, OPEC ministers met in Algiers. “Every piece of paper we had,” said one minister, “indicated we are going into a glut.” Fearing a price “rout,” OPEC announced plans for a substantial production cut.
“The price can fall, and there is no bottom to it,” warned Saudi petroleum minister Ali Al-Naimi after the meeting. “You have to be careful.” He added, alluding to the Jakarta meeting and the Asian financial crisis, “We can’t forget 1998.”
Prices rose after the announcement of the production cut, as would have been anticipated. But then, unexpectedly, they continued to rise. The reason was not immediately obvious. Shortly after Algiers, Naimi went to China. What he encountered there convinced him that what was needed was not a cutback in world production but additional output. “We had seen the trend in China since the early 1990s,” said one Saudi. “But the cumulative effect was greater than any of us had realized. China was facing a shortage at the time. It was a structural change in the oil market.”2 China was on a red-hot growth streak. Economic growth in 2003 was 10 percent; in 2004, another 10 percent. Coal, the country’s main source of energy, simply could not keep up with the d
emands of China’s export machine. Compounding shortages, the railway system that carried the coal was overloaded and gridlocked, and long trains of coal cars were sidetracked on tracks across the country. Oil was the only readily available alternative for electricity generation, whether in power plants or diesel generators at factories. As an insurance policy, enterprises were also stockpiling extra petroleum supplies. Oil demand normally grew at 5 or 6 percent a year in China. In 2004 it was growing at an awesome 16 percent—a rate even more rapid than the overall economy. The world market was not prepared. By August headlines were reporting soaring prices in “the incredibly strong crude market.”
The world economy was moving into a new era of high growth. Between 2004 and 2008, Chinese economic growth averaged 11.6 percent. India, entering on the “growth turnpike,” would average over 8 percent during those same years. Strong global growth translated into higher oil demand. Between 1999 and 2002, world oil demand increased 1.4 million barrels per day. Between 2003 and 2006, it grew by almost four times as much—4.9 million barrels.
That was the demand shock.
THE TIGHTEST MARKET
All the elements were there for an oil boom: Spending to develop new supplies had been held in check by the trauma of the 1998 price collapse. But demand was now surging, and the disruptions—in Venezuela, Nigeria, and Iraq—were taking supplies off the market. The result would be a historically tight market.
The Quest: Energy, Security, and the Remaking of the Modern World Page 19