There are very few silver linings to current record-high oil prices — but a more stable future for embattled Iraq may be one of them. Many experts believe that the country’s growing oil revenues will yield three benefits: an improving economy that can diminish some support for the insurgency, more money to develop Iraq’s security forces, and a greater willingness by other countries to invest in Iraq’s future.
The U.S.’s Energy Information Administration projects that crude oil prices will average about $127 a barrel in 2008 and $133 in 2009, up from the $72 average in 2007. With the world’s third largest proven reserves, and production having finally returned to 2.5 million barrels per day, Iraq’s revenues will surely be greater than in past years. Iraq is expected to draw $70 billion in oil revenue this year alone, and its government has announced plans to further increase oil production.
This brings us to the first benefit that analysts foresee: a growing Iraqi economy.
One of the first things Iraq will need to do is upgrade its equipment used for oil production. Much of this infrastructure is antiquated, and there have been over 450 attacks on Iraq’s pipelines, oil installations, and oil personnel since the insurgency began.
Michael Makovsky, foreign policy director at the Bipartisan Policy Center and former special assistant for Iraqi energy policy in the Office of the Secretary of Defense, told me that the funding needs of Iraq’s oil infrastructure are tremendous.
“Some can come from foreign investors,” he said, “but Iraq will have to put in a lot of money.”
There are also multiple spending needs inside the country — including building power plants, meeting Iraqis’ healthcare needs, and undertaking a housing reconstruction project for displaced people.
Iraqi government spokesman Ali al-Dabbagh recently told Iraqi media outlet Buratha News that “next year’s budget will focus on economy, investment and services [while] the focus was security in previous phases.”
A large federal budget means that funds should now be available to address Iraq’s little-mentioned healthcare crisis; currently each Iraqi receives an average of only $68 a year in medical services. It also means, as reported by Iraq’s Radio Sawa, that the government-sponsored food coupon program will receive additional support through a recent $21 billion supplementary federal budget.
Iraq’s federal government will also be able to expand provincial budgets. According to Iraq’s Al-Sabah newspaper, the government’s 2009 budget apportions $13.6 billion to provincial ministries — which will likely increase the national government’s influence at a regional level.
The combination of expanded social programs and a generally improving Iraqi economy will signal to citizens that the country’s future is not destitute.
Iraqis, shaken by years of violence, may have a reason to participate in the reconstruction process; improving conditions may diminish both direct and also “soft” support for the insurgency as citizens economically invested in Iraq’s future.
Danielle Pletka, the American Enterprise Institute’s vice president of foreign and defense policy studies, said, “The problem we had in Iraq related to the space in which a relatively few extremists could operate, tolerated by locals. They will no longer be tolerated if the locals are employed and invested in Iraq’s success.”
Some observers hope that a growing Iraqi economy may even diminish Iran’s influence. A senior American military intelligence officer expressed hopes that this new oil wealth could help incumbent Shias fund their campaigns in the next round of elections, and thus reduce Iran’s financial hold over them.
He argues that one reason the Islamic Supreme Council of Iraq (formerly the Supreme Council for Islamic Revolution in Iraq) was able to break with Iran was that the group began to run a budgetary surplus, and could thus provide for its own funding needs.
The second benefit that many analysts see for Iraq from high oil prices is the government’s ability to invest in the security forces.
Bill Roggio, a civilian military affairs analyst and my colleague at the Foundation for Defense of Democracies, told me that the security forces want to upgrade.
“The Iraqi army is currently a motorized infantry force,” he said. “It appears that the ministry of defense is looking to transform several motorized divisions into mechanized and armored divisions. This can cost billions per division, but now the Iraqi government will have the money to purchase the equipment.”
Michael O’Hanlon, a senior fellow at the Brookings Institution, told me that as increased oil revenues allow Iraq’s government to spend more on its military, “it might help deflect the U.S. political pressure that Iraq isn’t spending enough money on its security forces.”
The third benefit is that other countries will be more likely to help ensure Iraq’s continued stability.
Perhaps this can be glimpsed in Kuwait recently naming its first ambassador to Iraq since the 1991 Gulf War, and in Norway, Bahrain, and the United Arab Emirates considering reopening their embassies in Iraq.
The intelligence source quoted above said, “This is likely due to a combination of oil prices and the improving security situation in Iraq.”
Makovsky said, “In a world where more oil is needed on the market, Iraq has the potential to be one of the largest producers in the world.”
As Iraq’s oil production capacity increases through infrastructure investments, Iraq may earn not only a better seat in the global oil market, but also at the diplomatic table.
However, the road paved with oil is slippery. One reason improvements should not be seen as inevitable is the possible return of heavy insurgent violence, while another factor is the political situation and the government’s ability to effectively spend its newfound wealth.
Marina Ottoway, director of the Middle East program at the Carnegie Endowment for International Peace, told me: “They key is the security situation, which is in turn tied to the political situation.”
Pointing out that there is currently a debate about how successfully Iraq’s government is spending its budget, Ottoway said, “Greater revenue will not make a difference unless the government is organized well enough to spend it.”
Iraq may also face challenges specifically related to its increased oil wealth, as greater amounts of money pouring into the country will have an inflationary effect. Lowering interest rates may help Iraq cope with the rising costs of consumer goods, but only for so long. The government must develop a long-term strategy for stabilizing the economy.
But despite these uncertainties, high oil prices seem to be a significant boon for Iraq. They will provide the country with unprecedented economic leverage that can in turn enhance stability.
