Iraq's natural resources

Official Name: Republic of Iraq

Summary: In the twenty-first century, Iraq is an energy-rich country that is nevertheless unable to meet its own energy needs and is a long way from recovering from several decades of war, economic sanctions, and internal calamity.

The home of the cradle of civilization, the modern state of Iraq dates to 1919, when the region was removed from Ottoman Empire control in the wake of World War I. It was governed under the authority of the United Kingdom until 1932 and ruled by a monarchy established in 1921 until its overthrow in 1958. The succeeding Republic of Iraq, controlled by the Arab Socialist Ba’ath Party beginning in 1968, lasted until an American-led invasion in 2003 during the Iraq War. The next three years saw a series of transitional governments: first a multinational military coalition, followed by the Iraqi Interim Government and the Iraqi Transitional Government, until the Iraqi republic’s government took office in May 2006, following a December 2005 general election and the approval of a new constitution.

The new Iraqi government consists of a constitutional democracy with a national assembly, a prime minister named by the largest party in the assembly, an elected president and vice president, and a cabinet of ministers proposed by the prime minister and approved by the National Assembly. Both the prime minister and the president are considered fairly weak executives, with the ministers having considerable authority over their departments and the Assembly holding most of the power. Iraq is an energy-rich country that is unable to meet its own energy needs and is recovering from decades of war, economic sanctions, and internal calamity.

Iraq's economy remained dominated by the oil sector, which accounted for more than 90 percent of government revenue and 80 percent of foreign exchange earnings in 2016. This spoke to the need for economic diversification in the long term, but it also indicated much about the economy, which remains undermined by corruption and internal instability.

Oil

Iraq possesses considerable oil reserves, officially ranked as the third-largest reserves in the world, although the Iraqi government claims that new exploration data show that these reserves are the largest (larger even than Saudi Arabia’s). Estimates have varied wildly, from the US Geological Survey’s estimate of 78 billion barrels, the Central Intelligence Agency’s estimate of 143 billion barrels, to the Iraqi government’s claim of 350 billion barrels. For the immediate future, the size of the reserves is essentially irrelevant: After decades of economic sanctions, multiple wars, and prolonged civil unrest and insurgency, Iraq’s oil infrastructure is vastly out of date. Approximately 90 percent of the country’s power generation and distribution systems were destroyed in 1991 during the Persian Gulf War, and full recovery had not yet been achieved when the Iraq War began a decade later.

Furthermore, even in 1991 the country was still suffering from the 1980–88 Iran-Iraq War, which left the nation deeply in debt to foreign creditors and with losses amounting to nearly $100 billion; much of the infrastructure destroyed in 1991 was new construction that was part of the late 1980s attempt at recovery. The 2003 invasion by the United States and subsequent insurgency by the Islamic State group (commonly known as ISIS) have complicated that much-prolonged recovery; even after the implementation of an ambitious infrastructure-rebuilding program in 2004, sabotage, looting, and other violence limited the gains to about 20 percent—well below demand in a country that in theory has resources far in excess of what is needed for energy independence. Iraq has therefore faced regular fuel shortages and power outages, while the economy has been wracked by sabotage of pipelines and power plants.

Wells and other facilities are in need of repair, and the state of oil technology remains to be fully modernized. The World Bank has estimated that just maintaining 2010 production levels would require an investment of $1 billion per year in maintenance, repairs, and infrastructure improvements. More earnest reconstruction—not simply maintaining the state of the industry but rebuilding it and bringing it up to a modern standard—could increase that cost one hundredfold.

Furthermore, Iraq’s oil resources are not evenly distributed across sectarian lines, with little of the country’s oil in the possession of the Sunni population in central Iraq; most of it is in the Shiite south or Kurdish north. Despite these problems, oil wealth is the country’s surest route to rebuilding in the wake of the war, and the former minister of oil and later deputy prime minister of energy, nuclear scientist Hussain Ibrahim Saleh al-Shahristani, promised that money spent on the oil industry would generate revenue that in turn would pay for improvements in transportation, education, and healthcare, among other gains. In 2016, Iraq’s oil exports averaged 3.3 million barrels per day from southern Iraq, marking an increase over 2015.

Oil Contracts

In 2009, the Iraqi Oil Ministry issued service contracts to develop Iraq’s existing oil fields, in a move toward repairing the energy sector and moving closer to economic health and energy independence. Contracts covered seven oil fields and fifteen different foreign companies from Asia, Europe, and the United States, with the goal of increasing production to 11.9 million barrels per day, nearly as much as Saudi Arabia’s daily production of 12.5 million barrels. Iraq’s production share of these contracts is 25 percent, with the United Kingdom as the next largest beneficiary at 19 percent.

Since 2009, with the advent of these contracts, oil export earnings have returned to the levels seen before the Iraq War, though production hovered around 4 million barrels per day in mid-2016. This increase was instrumental in more than doubling Iraq’s gross domestic product from its 2005 level, although inflation—while remaining under control since 2006—remained uncomfortably high. Nevertheless, by 2017, the full potential of these contracts was not near realization. Too much work remains to upgrade the oil-processing, pipeline, and export infrastructure, even apart from the work that needs to be done at the oil wells themselves.

The United States has always supported private industry endeavors and Western investment in the rest of the world, often requiring reforms supporting such endeavors as a condition for its aid; in this case, the United States required the new body of law as a condition for ending its occupation. The accusation has also been leveled that no-bid contracts were awarded to American companies when other companies would have provided the same value of service for a lower percentage of revenue.

Key to the criticism is the fact that, although Saudi Arabia may have larger oil reserves, many of its reserves are reaching, or have reached, the point where the oil is becoming increasingly difficult and increasingly expensive to extract, after decades of production. In Iraq, by contrast, the oil is some of the easiest and cheapest in the world to extract, particularly because the oil fields have been underexploited for so long. Therefore, although the country is currently unable to make efficient use of its oil reserves, critics argue that it has been forced to trade significant long-term profits in return for short-term solutions, whereas the foreign companies involved have little to lose.

Other Industry

Iraq’s macroeconomic gains have not yet had much impact on the day-to-day life of the majority of its citizens, who are still fraught with economic hardship worsened by corruption, an anemic private sector, an ineffective banking system, rampant unemployment, energy shortages, and of course the disruptions of the ongoing insurgency by ISIS, which some would characterize as more akin to a civil war. Foreign investors outside the energy sector have been hampered by the difficulty in acquiring land, whereas those within the energy sector are faced with the prospect of Iraq’s deep infrastructure difficulties.

The manufacturing industry in Iraq, as in many oil-rich countries, is virtually a spin-off from the oil industry. Outside petroleum refining, the largest industries are the manufacture of chemicals (especially petrochemicals) and fertilizers. Private industry has long been constrained, first by legal impediments to privatization and the economic sanctions imposed by the outside world and, since 2003, by security problems. The construction industry is the only major industry not dependent on the oil industry, enjoying growth in the 1990s because of the government’s infrastructure building and in the 2010s by the need to rebuild a war-torn Iraq.

Electricity

Electricity in Iraq is subsidized, one of the factors responsible for increasing demand, along with the economic growth of the postwar years and especially the surge in purchases of electrical appliances and consumer electronics. Air conditioners, for instance, were banned under the regime of Saddam Hussein and are not so expensive as to be out of reach for the average Iraqi family, but they can be incredibly resource-intensive. In 2016 the electricity sector’s installed generating capacity was 28 billion kilowatt-hours, compared to consumption of 66 billion kilowatt-hours. Output has not even reached the levels of which the country was capable in 1990, immediately before the Gulf War.

Most Iraqi power plants were built in the 1970s and 1980s, the majority of them crude oil thermal power stations. There are some natural gas and hydropower stations. Approximately 6.2 percent of total installed capacity came from hydroelectric plants in 2017, where as 87.3 percent came from fossil fuels. A significant amount of electricity must be imported, totaling 12 billion kilowatt-hours in 2016.

Energy-sector rebuilding projects include a $3 billion contract with General Electric, which is building multifuel gas turbines; the World Bank’s funding of the Al-Hartha Power Station at Basrah, the largest power station in southern Iraq, to double its output; a $37 million hydropower project at the Dukan Dam in the north; and a $267.5 million contract with Turkish construction conglomerate Enka Insaat to build a power plant and six turbines in northern Iraq.

Bibliography

Central Intelligence Agency. “Iraq.” The World Factbook, 13 Sept. 2017, www.cia.gov/library/publications/the-world-factbook/geos/iz.html. Accessed 29 Sept. 2017.

Clark, William R. Petrodollar Warfare: Oil, Iraq, and the Future of the Dollar. Philadelphia: New Society, 2005.

Ebel, Robert E. Geopolitics and Energy in Iraq. Washington, DC: Center for Strategic and International Studies, 2010.

“EU and Iraq Sign Strategic Energy Partnership.” Petroleum Review 64, no. 757 (February 1, 2010).

Iraq Energy Policy, Laws and Regulation Handbook. Washington, DC: International Business Publications, 2008.

U.S. Energy Information Administration. “Country Analysis Brief: Iraq.” http://www.eia.gov/countries/country-data.cfm?fips=IZ.