Study Says Iraq’s Oil Vital to Global Markets, but Warns Political Risks Could Slow Oil Industry Growth

Contact: Doug Gavel
Phone: (617) 495-1115
Date: August 04, 2011

CAMBRIDGE, MA - Iraq has the world’s third-largest oil reserves but produces only four percent of the world’s oil. The new government has set ambitious growth goals for Iraq’s oil industry – adding 10 million barrels of daily output by 2017. Even if it achieves just half that increase, Iraq can become a central player in the global energy market while generating the revenues it badly needs to pay for health, education and sustained national development.
Translating that energy promise into reality will demand skillful navigation through an array of daunting domestic political challenges, a challenge made more complicated by the recent turmoil in the Arab world, says a new report by Harvard Kennedy School Professor Meghan L. O’Sullivan.
O’Sullivan underscores how it is in the interest of the United States and the international community that Iraq be able to realize its oil ambitions. Assuming robust demand growth in the years ahead, O’Sullivan stresses that Iraq will be critical in helping ensure global supply meets demand at a reasonable price.
Her study, "Iraqi Politics and Implications for Oil and Energy," analyzes five political factors complicating Iraq’s potential energy ascendance.
• Political Instability is the single greatest threat to energy development. Public pressure to address electricity shortages and other hardships forces the government toward short-term measures at the expense of developing a more strategic approach to energy development.
• Power-Sharing among the competing parties in the national unity government ensures inclusion but limits effectiveness. The national unity government, formed in December to end a post-election stalemate, is led by “a cabinet that has internalized all of Iraq’s political differences.”
• Resource Nationalism constrains the ability of the government to create the most attractive environment for international investors, although this has been deftly managed by the government thus far.
• Federalism remains a divisive issue. While Baghdad and the Kurdish regional government have made progress in recent months to reduce tension, some other provinces are now seeking more control over the development of their resources, posing another challenge to central authority.
• Regional dynamics in the tumultuous Arab region could affect Iraq’s energy future. Tensions with Kuwait could delay the Basra port expansion, for instance, and rivals could seek to slow Iraq’s oil output growth for fear of flooding the market.
O’Sullivan says the United States should work hard to sustain its strategic relationship with Iraq even if all U.S. forces withdraw from Iraq as currently planned at the end of 2011. “Although there is no question that Iraqis are tired of American involvement in their country, they also fear complete abandonment by the United States as many of them see America as the best antidote to their fears.”
O’Sullivan served as special assistant to President George W. Bush from 2004 to 2007 and as deputy national security advisor for Iraq and Afghanistan during the last two years of that tenure. She spent a total of two years in Iraq, and helped negotiate the security and strategic framework agreements between the two countries. She visited Iraq this summer.
O’Sullivan, who is the Jeane Kirkpatrick Professor of the Practice of International Affairs, leads the new Geopolitics of Energy Project in the school’s Belfer Center for Science and International Affairs. The report is a product of that program as well as part of a study conducted by the James A. Baker III Institute for Public Policy at Rice University and the Institute for Energy Economics in Japan.
Complementing O’Sullivan’s paper was a simultaneously published paper on "Iraqi Oil Potential and Implications for Global Oil Markets and OPEC Politics." That paper, by Amy Myers Jaffe and Jareer Elass, argues that ambitious targets set by the government of Iraq may not be reachable in the short-to-intermediate term while international oil companies operating in southern Iraq continue to experience infrastructure development problems.

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