Global Policy Forum

By Paul Klebnikov

Iraq has huge oil reserves and the world's cheapest lifting costs. That's why a war against Saddam could change everything.

Charting a military outcome in Iraq is dicey, and some say a bad turn of events could mean $100-a-barrel oil. But after any brief disruption, the oil-market effects of a neutralized or pro-Western successor to Saddam Hussein are unmistakably positive. Iraq sits on 120 billion barrels of proven oil reserves, second only to Saudi Arabia's 260 billion.

"Since 1961, only in the years between 1973 and 1980 was there any exploration of Iraq's oil reserves," says Fadhil Chalabi, who was a ranking official at the Iraqi Ministry of Oil from 1968 to the mid-70s. "During that short period there were many discoveries of giant oilfields, which could now be developed very easily."

Chalabi now directs the Centre for Global Energy Studies, a London think tank founded by former Saudi oil minister Sheikh Ahmed Zaki Yamani. He has ominous news for the sheikh's countrymen: Iraq's real recoverable oil reserves could be double today's estimate. "Ultimately they could exceed those of Saudi Arabia," Chalabi says. Wow. Therein lies a partial, if hardly party-line, answer to the doubters who say that an attack on Saddam would plunge Iraq into economic chaos.

After the chaos, it is hoped, would come some oilfield development that would leave both Iraqis and the world's energy buyers better off. Noteworthy about Iraq's oil industry is how much of it is going to waste--idle wells, rusting pipes and pumping stations that haven't been serviced in more than a decade. It's kind of like a Colorado ghost town, abandoned since the silver-mining operation closed down ... only the silver is all still in the ground, and in unbelievable quantities.

A lot of Iraq's oil lies in huge virgin fields, discovered in the 1970s before Saddam turned the place into a military bastion, but not touched since. The Majnoun field close to the Iranian border, for instance, contains recoverable reserves of 11 billion barrels. That's equivalent to a third of the proven reserves of the entire U.S. And Majnoun is only one of several monster Iraqi oilfields still waiting for the first pump to get cranking. Not only is the oil in these Iraqi fields low in sulfur, it is also close to the surface. No need to inject water or gas or chemicals in order to upgrade recovery. In short, it's cheap to produce.

"Iraq has the lowest lifting costs in the world," says Chalabi. "I estimate it at below $1 a barrel, compared with Saudi Arabia, which is around $2.50 a barrel." This is in a completely different league from, say, the Gulf of Mexico or the North Sea, where it can take $3 to $4 to lift a barrel to the surface. Another reason Iraqi oil production could take off quickly is that pipelines and terminals are already in place, though underutilized. Same with Iraq's many qualified engineers and technicians. (Saudi Arabia, in contrast, has to hire foreign engineers.) Moreover, through pipelines that terminate in Turkey, Syria and (potentially) Israel, Iraq has the ability to funnel most of its oil directly to the eastern Mediterranean, bypassing the Persian Gulf entirely.

Who would be likely to get juicy deals in postwar Iraq? None of the big American or British oil companies are there. But if a U.S.-led force succeeds in ousting Saddam, it's a good bet that these companies will come in as soon as the fighting has died down. At its peak, in 1980, Iraq reached a capacity to produce 4 million barrels a day. Since then, battered by wars, underinvestment and economic sanctions, production has declined to 2 million barrels. "Iraq will require a minimum of $30 billion in investments to develop its oil industry," says Chalabi. "With that, it could reach a production rate of 7 million to 8 million barrels a day within four or five years." That's close to what Saudi Arabia produces today.

With such a huge new supply of oil on the world market, prices could plummet. Saudi Arabia might lose its swing position within the Organization of Petroleum Exporting Countries, and the cartel itself might lose what little ability it has left to set prices. "Iraq is a member of OPEC, but I don't think the other members would be able to restrain it, because Iraq will need every dollar it can get to rebuild itself," predicts Chalabi, who also served as acting secretary general of OPEC in the mid-1980s. "I could see the price for West Texas Intermediate going from $30 today to $15, and OPEC won't be able to do anything about it." So Saddam's fall would, in that sense, be bad news for some of his rival regimes in oil-rich lands. But for the rest of the world, a gusher.