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Opec And The Economic Conquest Of Iraq
Why Iraq Still sells its oil à la cartel
Twilight of the neocon gods
By Greg Palast
10/24/05 "Harper's"
-- -- TWO AND A HALF YEARS AND $202 BILLION into
the war in Iraq, the United States has at least one significant new
asset to show for it: effective membership, through our control of
Iraq's energy policy, in the Organization of the Petroleum Exporting
Countries (OPEC), the Arab-dominated oil cartel.
Just what to do with this proxy power has been, almost since
President Bush's first inaugural, the cause of a pitched battle
between neoconservatives at the Pentagon, on the one hand, and the
State Department and the oil industry, on the other. At issue is
whether Iraq will remain a member in good standing of OPEC,
upholding production limits and thereby high prices, or a mutinous
spoiler that could topple the Arab oligopoly.
According to insiders and to documents obtained from the State
Department, the neocons, once in command, are now in full retreat.
Iraq's system of oil production, after a year of failed free-market
experimentation, is being re-created almost entirely on the lines
originally laid out by Saddam Hussein.
Under the quiet direction of U.S. oil company executives working
with the State Department, the Iraqis have discarded the neocon
vision of a laissez faire, privatized oil operation in favor of one
shackled to quotas set by OPEC, which have been key to the 148% rise
in oil prices since the beginning of 2002. This rise is estimated to
have cost the U.S. economy 1.5% of its GDP, or a third of its total
growth during the period.
Given this economic blow, and given that OPEC states account for 46%
of America's oil imports, it may seem odd that the United States'
"remaking" of Iraq would allow for a national oil company that props
up OPEC's price gouging. And in fact the original scheme for
reconstruction, at least the one favored by neoconservatives, was to
privatize Iraq's oil entirely and thereby undermine the oil cartel.
One intellectual godfather of this strategy was Ariel Cohen of the
Heritage Foundation, who in September 2002 published (with Gerald P.
O'Driscoll, Jr.) a post-invasion plan, "The Road to Economic
Prosperity for a Post-Saddam Iraq," that put forward the idea of
using Iraq to smash OPEC. Cohen explained to me how such an
extraordinary geopolitical feat might be accomplished. OPEC
maintains high oil prices by suppressing production through a quota
system effectively imposed on each member by Saudi Arabia, which
reigns by dint of its overwhelming reserves. The Saudis, to maintain
their control on pricing, must keep a lid on production from other
members-particularly Iraq, which has the second greatest proven
reserves.
Under Saddam Hussein, Iraq adhered to the OPEC quota limit
(historically set to equal Iran's, now 3.96 million barrels a day)
via state ownership of all fields. Cohen reasoned that if Iraq's
fields were broken up and sold off, a dozen competing operators
would quickly crank up production from their individual patches to
the maximum possible, swiftly raising Iraq's total output to 6
million barrels a day. This extra crude would flood world petroleum
markets, OPEC would devolve into mass cheating and overproduction,
oil prices would fall over a cliff, and Saudi Arabia-both
economically and politically - would fall to its knees.
By February 2003, Cohen's position had been enshrined as official
policy, in the form of a hundred-page blueprint for the occupied
nation titled, "Moving the Iraqi Economy from Recovery to
Sustainable Growth"-a plan that generally embodied the principles
for postwar Iraq favored by Defense Secretary Donald Rumsfeld,
Deputy Secretary Paul Wolfowitz, and the Iran-Contra figure Elliott
Abrams, now Deputy National Security Adviser. Nominally written by a
committee of Defense, State, and Treasury officials, the blueprint
was in fact the brainchild of a platoon of corporate lobbyists,
chief among them the flattax fanatic Grover Norquist. From
overhauling tax rates to rewriting copyright law, the document
mapped out a radical makeover of Iraq as a free-market Xanadu-a sort
of Chile on the Tigris-including, on page 73, the sell-off of the
nation's crown jewels: "privatization... [of] the oil and supporting
industries."
Following the U.S. military's swift advance to Baghdad, those
skeptical of the neocon plan were summarily brushed aside. Chief
among the castoffs was General Jay Garner, the shortlived occupation
viceroy who on the very night he arrived in Baghdad from Kuwait
received a call from Rumsfeld informing him of his dismissal. When I
met with Garner last March at the Washington offices of L3
Corporation's giant security subsidiary he now heads, the general
told me that he had resisted imposing on Iraqis the plan's sell-off
of assets, especially the oil. "That's just one fight you don't have
to take on right now," he said. "You don't want to end the day with
more enemies than you started with."
In plotting the destruction of OPEC, the neocons failed to predict
the virulent resistance of insurgent forces: the U.S. oil industry
itself. From the outset of the planning for war, U.S. oil executives
had thrown in their lot with the pragmatists at the State Department
and the National Security Council. Within weeks of the first
inaugural, prominent Iraqi expatriates-many with ties to U.S.
industry-were invited to secret discussions directed by Pamela
Quanrud, an NSC economics expert now employed at State. "It quickly
became an oil group," one participant, Falah Aljibury, told me.
Aljibury, an adviser to Amerada Hess's oil trading arm and to
investment banking giant Goldman Sachs, who once served as a back
channel between the United States and Iraq during the Reagan and
George H. W. Bush administrations, cut ties to the Hussein regime
following the invasion of Kuwait.
The working group's ideas about the war had been far less
starry-eyed than those of the neocons. "The petroleum industry, the
chemical industry, the banking industry-they'd hoped that Iraq would
go for a revolution like in the past and government was shut down
for two or three days," Aljibury told me. "You have a martial law .
. . and say Iraq is being liberated and everybody stay where they
are . . . Everything as is." On this plan, Hussein would simply have
been replaced by some former Baathist general. One candidate was
General Nizar Khazraji, Saddam's former army chief of staff, who at
the time was under house arrest in Denmark pending charges for war
crimes. (Khazraji was seen in Iraq a month after the U.S. invasion,
but he soon disappeared and has not been heard from since.)
Roughly six months before the invasion, the Bush Administration
designated Philip Carroll to advise the Iraqi Oil Ministry once U.S.
tanks entered Baghdad. Carroll had been CEO of both Fluor
Corporation, now a major contractor in Iraq, and, earlier, of Royal
Dutch/Shell's U.S. division. In May 2003, a month after his arrival
in Iraq, Carroll made headlines when he told the Washington Post
that Iraq might break with OPEC: "[Iraqis] have from time to time,
because of compelling national interest, elected to opt out of the
quota system and pursue their own path. . . . They may elect to do
that same thing. To me, it's a very important national question."
Carroll later told me, though, that he personally would not have
been supportive of privatizing oil fields. "Nobody in their right
mind would have thought of doing that," he said.
Soon after Carroll resigned his post in September 2003, the new
provisional government appointed an oil minister, Ibrahim Bahr al-Uloum.
Uloum (who had been maneuvered into the job by then-neocon favorite
Ahmad Chalabi) quickly fired Muhammad al-Jiburi, chief of Iraq's
State Oil Marketing Organization, and Thamer Ghadhban, the expert in
charge of the southern oil fields, both of whom had been trusted by
the Western oil industry. Production faltered from a combination of
incompetence, wholesale theft (Iraq's oil was unmetered), sabotage,
and corruption that one oilman told me was "rampant," with "direct
payoffs to government officials by commercial operators."
With pipelines exploding daily, the fantasy of remaking Iraq's oil
industry also went up in flames. Carroll was replaced by another
Houston oil chieftain, Rob McKee, a former executive vice-president
of ConocoPhillips and currently the chairman-even during his tenure
in Baghdad-of Enventure, an oil-drilling supply subsidiary of the
Halliburton Corporation. McKee had little tolerance for the neocons'
threat to privatize the oil fields. A close associate of McKee's and
the executive adviser to Hess's trading arm, Ed Morse, told me that
"Rob was very promotive of putting in place a really strong national
oil company," even if he had to act over the objections of the Iraqi
Governing Council. Morse, who says he takes as many as six calls a
day from the Bush Administration regarding Iraq, is one of the men
to whom Washington turns to obtain the views of Big Oil. Like
Carroll and McKee, Morse sneers at what he calls "the obsession of
neo-conservative writers on ways to undermine OPEC." Iraqis, says
Morse, know that if they pump 6 million barrels a day, i.e., 2
million above their expected OPEC quota, "they will crash the oil
market" and bring down their own economy.
In November 2003, McKee quietly ordered up a new plan for Iraq's
oil. The drafting would be overseen by a "senior adviser," Amy
Jaffe, who had worked for Morse when he held the formidable title of
Chairman of the Council on Foreign Relations-James Baker III
Institute Joint Committee on Petroleum Security. Jaffe now works for
Baker, the former Secretary of State, whose law firm serves as
counsel to both ExxonMobil and the defense minister of Saudi Arabia.
The plan, nominally written by State Department contractor
BearingPoint, was guided, says Jaffe, by a handful of oil industry
consultants and executives.
For months, the State Department officially denied the existence of
this 323-page plan for Iraq's oil, but when I identified the
document's title from my sources and threatened legal action, I was
able to obtain the complete report, dated December 2003 and entitled
"Options for Developing a Long Term Sustainable Iraqi Oil Industry."
The multi-volume document describes seven possible models of oil
production for Iraq, each one merely a different flavor of a single
option: the creation of a state-owned oil company. The seven options
ranged from the Saudi Aramco model, in which the government owns the
whole operation from reserves to pipelines, to the Azerbaijan model,
in which the state-owned assets are operated almost entirely by "IOCs"
(International Oil Companies). The drafters had little regard for
the "self-financing" system, such as Saudi Arabia's, which bars IOCs
from the fields; they prefer the production-sharing agreement (PSA)
model, under which the state maintains official title to the
reserves but operation and control are given to foreign oil
companies. These companies then manage, fund, and equip crude
extraction in exchange for a percentage of sales receipts.
While promoting IOC control of the fields, the authors take care to
warn the Iraqi government against attempting to squeeze IOC profits:
"Countries that do not offer risk-adjusted rates of return equal to
or above other nations will be unlikely to achieve significant
levels of investment, regardless of the richness of their geology."
Indeed, to outbid other nations for Big Oil's favor will require
Iraq to turn over quite a large share of profits, especially when
competing against countries such as Azerbaijan that have given away
the store. The Azeri government, notes the report, has "been able to
partially overcome their risk profile and attract billions of
dollars of investment by offering a contractual balance of
commercial interests within the risk contract." This refers to the
fact that Azerbaijan, despite its poor oil quality and poor
location, drew in the IOCs via scandalous splits of revenue allowed
by the nation's corrupt government.
Given how easily the interests of OPEC and those of the IOCs can be
aligned, it is certainly understandable why smashing the oil cartel
would not strike oilmen as a good idea. In 2004, with oil
approaching the $50-a-barrel mark all year, the major U.S. oil
companies posted record or near record profits. ConocoPhillips, Rob
McKee's company, this February reported a doubling of its quarterly
profits from the previous year, which itself had been a company
record; Carroll's former employer, Shell, posted a record-breaking
$4.48 billion in fourth-quarter earnings. ExxonMobil last year
reported the largest one-year operating profit of any corporation in
U.S. history.
When I talked to Ariel Cohen at Heritage, his dream of smashing OPEC
in shambles, he blamed the State Department for acquiescing to the
Saudis and to Russia, which also benefit s from selling oil at high
OPEC prices. The poisonous policies were influenced, he said, by
"Arab economists hired by the State Department who are basically
supporting the witches' brew of the Saudi royal family and the
Soviet ostblock . . . because the Saudis are interested in
maximizing their market share and they're not interested in fast
growth of the Iraqi output."
According to Morse, the switch to an OPEC-friendly policy for Iraq
was driven by Dick Cheney himself. "The person who is most
influential in running American energy policy is the Vice
President," who, says Morse, "thinks that security begins by . . .
letting prices follow wherever they may."
Even, I asked, if those are artificially high prices, set by OPEC?
"The VP's office [has] not pursued a policy in Iraq that would lead
to a rapid opening of the Iraqi energy sector . . . so they have not
done anything, either with producers or energy policy, that would
put us on a track to say, 'We're going to put a squeeze on OPEC.'"
Opposition to OPEC was handled in a style that would have made
Saddam proud. On May 20, 2004, Iraqi police raided Ahmad Chalabi's
home in Baghdad and carted away his computers and files. Chalabi was
hunted by his own government: the charge was espionage, no less, for
Iran. Chalabi's Governing Council was soon shut down and, crucially,
Bahr al-Uloum was yanked from the Oil Ministry and replaced by the
very men he had removed: Thamer Ghadhban, who took al-Uloum's job at
the oil ministry and Chalabi rival Muhammad al-Jiburi who was made
minister of trade.
But just when you thought the fat lady sang for the neo-cons, who
should rise from his crypt eight months later but Ahmad Chalabi. In
January 2005, Chalabi cut a deal with his former oil minister's
father, a Shia power broker, and rode that religious ethnic vote
back into office. Chalabi landed himself the post of Second Deputy
Prime Minister and, in addition, the tantalizing title of interim
oil minister. The espionage investigation was dropped; the King of
Jordan offered to pardon Chalabi for the $72 million missing from
Chalabi's former bank; and Chalabi once again turned over his oil
ministry to Sheik al-Uloum's son. The Texans' OPEC man Ghadhban, was
again kicked downstairs.
But Chalabi had learned his lesson: don't mess with Texas, or the
Texan's favorite cartel. A chastened Chalabi now endorses Iraq's
cooperation with OPEC's fleecing of the planet's oil consumers.
And Dick Cheney, far from "putting the squeeze on OPEC," has taken
his de facto seat there, assenting by silence to the oil monopoly's
piratical price gouging. But hasn't OPEC's stratospheric crude
prices choked the life out of America's auto industry and bankrupted
half a dozen airlines? In the Vice-President's bunker the
elimination of jobs of Democratic-leaning union members is likely
seen as a bonus for the good deed of boosting oil industry profits
far above the ozone layer.
**********
Greg Palast is the author of the New York Times bestseller, The Best
Democracy Money Can Buy. This is his fourth investigative report for
Harper's Magazine. Leni von Eckardt was chief researcher with Palast
on this project. This is the Palast team's fifth Project Censored
award from California State University's school of journalism.
The BBC Television Newsnight broadcast of this story was produced by
Meirion Jones. View the BBC report and sign up for Palast's
investigation updates at
www.GregPalast.com
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