Frank R. Gunther, an economics professor and retired US marine who spent two years in Iraq as an economic advisor to the government, doesn't believe that the long term impact of the US invasion and occupation of that country has been altogether positive, especially from an economic standpoint. Gunther points out that Iraq's high birth rate has contributed to the rapid annual increase in labor force growth in that country. He estimates that every year, about 850,000 Iraqis reach employment age. This is startling in a country with a population of only 32.6 million as of 2012. Americans add about 1.25 million people to the domestic labor force every year and our total population is currently just over 300 million! We have close to ten times the population as Iraq so imagine adding over 12 million people to the workforce every year! And our economy is much larger and more advanced generating a much greater per capita income annually so that the absorption capacity is much greater.
The impact of Iraq's annual labor force growth every year is devastating to both the economy and society. Gunther points out that the "combined unemployment and underemployment rate of over 80%!" Such levels of unemployment and underemployment are politically destabilizing which may partly explain such consistently high levels of sectarian violence in Iraq over the past ten years. Gunther estimates that at least 250,000 new jobs must be added a year to the Iraqi economy just to prevent the unemployment rate from increasing! Absent such levels of job growth, there is no hope for a politically stable and peaceful Iraq.
A key to much of the solution is oil and the control of the revenues that oil exports bring in. Gunther points out that Iraq, which he describes as one of the most seriously resource dependent countries in the world, took in about $87 billion from oil exports in 2013 but the problem is that this is no panacea. Despite oil's contributing two thirds of Iraq's annual GDP, it accounts for less than three percent of domestic employment; expanding oil production and exports doesn't increase employment commensurately. Economists have generally argued in the past that excessive dependency by most third world countries on high priced resourced such as oil can exacerbate problems of stagnation and lack of economic diversity. The reason is that it leads to a highly overvalued domestic currency making a variety of imports artificially cheap thus inhibiting the growth of domestic manufacturing and even leading to the stifling of agricultural output. Sharp fluctuations in world oil prices cause shocks to the domestic economy and make government planning difficult especially since oil revenues contribute so overwhelmingly to the national budget.
Recent reports in the business press suggest continued and intensified reliance on the oil production and exports to sustain the economy. Business Insider reported that "daily oil exports have shot up in February to 2.8 million barrels from nearly 2.3 million barrels in the previous month..." Since 2011, a surge in Iraq oil production and exports has taken place increasing national dependence on oil revenues providing the nation with needed foreign exchange. The opening of Iraqi oil fields to exploration and drilling by international oil firms has contributed greatly to the growth of Iraq's oil industry. Experts have estimated potential Iraqi oil production on a national basis to be as high as 12 million barrels/day which is on par with Saudi daily oil production. In fact, recently daily levels have exceeded three million barrels, which is an improvement over the 2.7 million barrels/day average begun in 2011. Since 2012, Iraq production has been well over 3.2 million barrels/day and earlier this February, Iraqi exports exceeded 3.6 million barrels/day, a thirty year high! Total Iraqi reserves are now estimated to exceed 143 billion barrels giving Iraq the fourth largest oil reserves in the world. Oil exports and daily production in Iraq is projected to improve steadily over time. Experts believe that higher targets can be easily achieved over the next decade.
So why is Iraq suffering poverty and high unemployment. A recent UN report highlights the gap between Iraq's oil contribution to GDP and employment. The report puts the unemployment rate for Iraqis under the age of 25 at about 23% also highlighting the gap between oil's heavy role in the economy and concomitant negligible contribution to national employment. The report also mentions the oil sector's negative impact on the non-oil sector and the manner in which it inhibits its growth through an overvalued currency and by drawing in highly disproportionate levels of capital investment. In fact, Iraq's oil dependency skews everything in the economy from prices to urban wage levels to distribution patterns of government spending.
It wasn't until 2005 when a new election and the drafting of a new constitution created the apparent political stability sufficient for multinational oil corporations to begin to consider terms upon which they would enter into production agreements with the Iraqi Oil Ministry. The Oil industry infrastructure was in utter disrepair due to years of neglect and war damage. It would take billions over time to refurbish Iraq's Oil Industry and bring production levels up to pre-war levels. The fact that the war had cost Iraq the bulk of its petroleum engineers, technicians, scientists and experienced industry management also harmed the oil industry recovery, and even more so, strengthened the Iraqi Oil Ministry's reliance on the foreign oil corporations for technical support, exploration, drilling and the repair of wells and pipelines.
Aside from ongoing civil strife (which often took a toll on oil infrastructure) and political instability, the real problem for the oil firms was the lack of a hydrocarbon industry law that stabilized and legally codified the terms of oil production in Iraq thus guaranteeing the long term investments of these firms and thus their profits. Iraqi nationalism prohibited the passage of "the Oil Law" that the US government and occupation authorities were seeking. Strikes by oil workers' unions opposing the law were put down by the US military and armed opposition by such forces as that army of Muqtada al Sadr's Shi'ite militia posed a mortal threat to the occupation's attempts to determine Iraq's political future.
The only existing law governing Iraq's oil industry was a 1967 law that stipulated that all oil contracts between the Iraqi government and foreign oil firms had to be ratified by the Parliament as if it were a treaty and further enabled by a specific law allowing the contract to go into effect. This was not seen as unreasonably cumbersome because of the impact such contracts had on the Iraqi economy; control of a sufficiently large oil field could have a determining effect. The problem was that given the state of Iraqi instability, oil firms needed a guarantee that any contract they signed was enforceable. Most of the contracts being signed were in a legal state of limbo depending completely on the good faith of the Iraqi Oil Ministry. The Oil Law, which never came to pass, would have guaranteed the rights of the companies to production sharing agreements and immunity from the effects of new laws regarding the economy and oil production. Most of all it would have guaranteed their rights to have disputes resolved in international courts with the terms of the contracts elevated to the status of an international treaty (ie. international law!) According to Greg Muttitt, a free lance journalist who has done peerless work on wartime Iraqi oil politics, the number of such contracts, involving a variety of countries and oil firms, have gone from 385 in 1990 to 2,495 in 2005(Muttitt, 2012, 154). The security of their investments was one of the most primary concerns of big oil in Iraq at the time.
The proposed oil law not only guaranteed immunity from new laws and international contract enforcement, it also allowed for a variety of lucrative production sharing agreements with no Parliamentary approval or oversight as well as giving each of the provincial administrations of each of the three regions of Iraq to approve and implement their own contracts with foreign firms without approval from the central government. This was already being done in Kurdistan by September 2008 right as the Iraqi Parliament rejected the proposed Oil Law. Though Oil Minister Hussain al-Shahristani declared the Kurdistan Regional Government's (KRG) contracts with foreign oil firms illegal (only the national government could approve such contracts) the KRG continued with its independent policies resulting in rapid oil exploration in the Kirkuk oil fields. This is exactly what many Iraqi nationalists feared regarding the Oil Law; it would diminish and ultimately eradicate Iraqi sovereignty for all intents and purposes. The oil law issue seemed to unite most of the country across sectarian lines for the first time since the start of the occupation and this was quite frightening to the international oil firms and the occupation authorities in general. Eventually, production sharing agreements (PSAs) were considered by the Oil Ministry. Muttitt explains what a PSA is;
The favoured system of the oil corporations is the production sharing agreement (PSA)...In a PSA, the foreign company provides the capital investment, first in exploration, then drilling and the construction of infrastructure. The first proportion of oil extracted is then allocated to the company, which uses oil sales to recoup its costs and capital investment – the oil used for this purpose is termed ‘cost oil’. There is usually a limit on what proportion of oil production in any year can count as cost oil (commonly 40-60%). Once costs have been recovered, the remaining ‘profit oil’ is divided between state and company in agreed proportions. The company is taxed on its profit oil. There may also be a royalty payable on all oil produced.The PSAs were extremely unpopular in the Iraqi Parliament and in general because, (a) PSA contracts were immune from all new national legislation; (b) firm profit share guaranteed against loss by government and, (c) terms of the contract are enforced as if it were an international treaty. Further, the cost of any adjustment in the contract terms are born by the Oil Ministry, not the company. Greg Muttitt of the watchdog organization PLATFORM argued back in 2006 when the oil law, which was based almost entirely on PSAs, was being hotly contested in Iraq that Iraq could be the big loser if the law was passed. PLATFORM experts estimated that; "Using an average oil price of $40 per barrel, our projections reveal that the use of PSAs would cost Iraq between $74 billion and $194 billion in lost revenue, compared to keeping oil development in public hands." On the other hand, especially if oil prices rose, companies stood to gain billions in profit with rates of return often exceeding 100%! The Iraqi government stood to lose just as much with a variety of such PSAs.
Further, the PSAs would give foreign oil firms total control over production rates in 75% of Iraqs oil fields, according to Muttitt with the remaining 25% under the complete control and direction of the Oil Ministry which had been exploiting those fields since before the war. Only in Kurdistan did the PSA model hold sway. In the southern and central oil fields things were different. From 2009 onward, what the Iraqi Oil Ministry called "service agreements" were implemented. Instead of giving the companies a share of the oil produced, as in a PSA, companies would received a fixed fee on each barrel of oil extracted with all their production costs reimbursed by the Oil Ministry. The deals remained highly profitable for the oil firms. In oil contracts where the Oil Ministry formed a joint venture with the oil firm the firm's share was 75% in many cases. The new fields being auctioned to the oil firms were some of the most productive and cheap to exploit in the region. From this point on, according to Muttitt, rates of return on most newly developed oil fields ranged from ten percent to twenty percent, even at a $2/barrel royalty for the oil firms! Muttitt asserts in his book Fuel on the Fire: Oil and Politics in Occupied Iraq;
Deutsche Bank predicted returns of 22% for BP's Rumalia [fields], 19-20 percent for ENI's Zubair [fields], and 19% for ExxonMobil's West Qurna 1[fields]. Peter Wells, director of geological consultant Neftex, estimated rates of return of 15-20 percent on Majnoon and 15% on West Qurna 2, even if the companies achieved only 1.2 million barrels per day of production rather than the agreed upon 1.8 million...So how does that square with $2/barrel? Under the terms of the contract, that money is all profit since companies' costs would be fully reimbursed. (Muttitt; 2012; 288)Over time, Iraq's oil production has increased making billions in profit for international oil firms while Iraq is left in poverty. As predicted by many, greatly increased oil production benefited mostly the international oil firms who continue to receive more and more Iraqi fields to develop as international prices for crude oil continue to rise. The international oil firms had enormous leverage over the Iraqi state so any deal that was to emerge would doubtless be profitable for big oil. But, Iraq's overall economy has up to now seen little benefit. Muttitt, in a recent assessment, wrote;
Here, as a start, is a little scorecard of what’s gone on in Iraq since Big Oil arrived two and a half years ago: corruption’s skyrocketed; two Western oil companies are being investigated for either giving or receiving bribes; the Iraqi government is paying oil companies a per-barrel fee according to wildly unrealistic production targets they’ve set, whether or not they deliver that number of barrels; contractors are heavily over-charging for drilling wells, which the companies don’t mind since the Iraqi government picks up the tab.Over the past five years or so, contracts of all types have been awarded to international firms to exploit Iraq's vast oil fields. Iraq suffers poverty and environmental damage even as the companies profit and production booms. It turned out that the Oil Law was a proverbial "tempest in a teapot;" the oil giants have done quite well without it! Billions in profits have accrued to the global oil firms since the invasion and occupation yet the Iraqi state has gleaned comparatively little of the revenues. One report cites Iraqi Oil Ministry figures showing that between 2003 and 2011, the Iraqi government has earned a cumulative total of $289 billion or just $36 billion a year; a paltry sum for the needs of a country of over 30 million people recovering from a long war! THe problem is made all the worse by the fact that Kurdistan, a region that holds about 45 billion barrels of oil in reserve (nearly a third of Iraq's total oil reserves) exports most of its oil through Turkey (which now acts as an energy transport hub through its pipeline terminal on the eastern Mediterranean) and retains the revenues to govern the Iraqi Kurdistan, a region made, for all intents and purposes, autonomous from Baghdad by the US/UK invasion and occupation. The intention was to give international oil giants easier access to Kurdistan's rich reserves of oil.
Post-occupation Iraq is an excellent example of how, in the third world, key national industries become disentangled from the economies and societies in which they should be embedded to serve corporate and consumer interests that are based a great distance away. The result is often more profit for transnational corporations and poverty for the countries in which they do business.