Iraq's location has long made it central to the affairs of other nations. The presence of oil makes it crucial to the concerns of other nations and provides Iraq with a powerful weapon in an increasingly industrial and global economy. Regional conflicts, international sanctions, the 2003 US invasion, and resulting efforts to rebuild the damaged economy amidst an ongoing insurgency and sectarian violence has greatly affected Iraqi oil production for the last 25 years.
After the discovery of oil at Baku (on the west side of the Caspian Sea) in the 1870s (Figure 5a), foreign groups began seeking concessions for exploration in Iran and in the area of the Ottoman Empire that became Iraq after World War I. The Anglo-Persian Oil Company (later renamed the Anglo-Iranian Oil Company and still later British Petroleum) was granted a concession in Iran and discovered oil in 1908. Shortly before World War I, the British government purchased majority ownership of the Anglo-Persian Oil Company. The war highlighted the necessity of exercising control over the area's oil resources. For Iraq, transportation remained the main obstacle to the efficient exporting of oil and highlighted its reliance on relations with other nations to facilitate this process. By 1938, Iraq began to export oil in significant quantities. Production averaged 4 million tons per year until World War II, when restricted shipping in the Mediterranean forced production down sharply.
Iraqi oil production rebounded fairly quickly and government oil revenues grew to $100 million in 1952. The increased oil payments, however, did little for the masses. Corruption among high government officials increased; oil companies employed relatively few Iraqis; and the oil boom also had a severe inflationary effect on the economy, particularly hurting the urban poor and the salaried middle class.
The monarchy largely ignored the discontent among those left out of the growing national wealth. Even when the secular Baath party overthrew the monarchy in the 1960s, it continued this elite control. Saddam Hussein, in power from 1979 until 2003, maintained the government's central role in the oil-driven economy.
Other nations in the region were affected and influenced by Iraqi oil production. The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 as an economic manifestation of the Pan-Arab movement. It was also fraught with internal dissent over production amounts and whether to link access to political behavior. The eight-year shutdown of the Suez Canal that followed the June 1967 Arab-Israeli War increased the importance of Mediterranean oil producers because of their proximity to European markets. Cold War tensions also surfaced in the area when Iraq used Soviet money to enhance its productivity. The USSR provided more than $500 million worth of aid for drilling rigs, pumps, pipelines, a deep-water port on the Persian Gulf, tankers, and a large contingent of technicians. The October 1973 Arab-Israeli War allowed the Iraqis to take complete control of their oil resources, and Iraq became one of the strongest proponents of an Arab oil boycott of Israel's supporters. Oil exports were further restrained in April 1982, when Syria closed the pipeline running from Iraq to the Mediterranean. In response, Iraq launched a major effort to establish alternative channels for its oil exports. For the last 25 years, Iraq's oil production has been compromised by regional tensions stemming from conflicts with Iran and Kuwait, and resulting international condemnation in the form of UN sanctions.
The early 1970s was an important time for the Iraqi economy and the government's role in it. In 1972 the government nationalized the Iraq Petroleum Company (IPC), which had been owned by foreign oil companies. The nationalization, together with the rise in the price of crude oil that the Organization of Petroleum Exporting Countries (OPEC) engineered in 1973, had the effect of raising Iraq's oil revenues from $1 billion in 1972 to $8.2 billion in 1975.
This sharp increase in revenue solidified the government's role in the economy, making it the primary agent for transferring wealth from the petroleum industry to the rest of the economy. The government allocated economic resources to various sectors of the economy and among different social classes and groups. Beginning in the 1970s, the Iraqi government's policies affected employment, income distribution, and economic development. It carried out extensive economic planning and exercised heavy control over agriculture, foreign trade, communication networks, banking services, public utilities, and industrial production, leaving only small-scale industry, shops, farms, and some services to the oversight of the private sector. (1)
(1) www.msn.encarta:Iraqi Economy Under Hussein
Iraq's 1990 invasion of Kuwait had severe repercussions for its oil industry. The United Nations imposed economic sanctions which hurt Iraq's ability to earn revenue from oil exports. Damage from the fighting further affected its economic capabilities. By 1996, Iraq was in a dire situation so the United Nations created the oil-for-food agreement, which permitted Iraq to export oil worth $2 billion every six months in exchange for the right to purchase food and medicine for its civilian population. Iraq was not able to pump the necessary amount for a variety of reasons, including damage to equipment and loss of skilled workers. Therefore Iraq did not export as much oil as was allowed. Consequently, in 1996 Iraq exported oil worth only $400 million and imported food and medicine worth $492 million. The UN agreed in 1998 to increase the value of the oil-for-food arrangement to $5.2 billion every six months. Iraq's economic policy at the start of the 21st century focused mainly on building a coalition of nations to support the removal of these UN sanctions. The primary way the Iraqi government could win support from other nations was by promising lucrative post-sanction oil contracts to potential allies. Most experts believed that Russia, China, and France would have been the main beneficiaries of these promises. The Hussein government focused on circumventing the sanctions, primarily through oil smuggling. (2)
(2) www.msn.encarta:Saddam Hussein's Rule: Sanctions
The military victory of the US-led coalition in March-April 2003 resulted in the shutdown of much of Iraq's central economic administrative structure (Figure 5b). Although a comparatively small amount of physical plant was damaged during the hostilities, looting, insurgent attacks, and sabotage have undermined efforts to rebuild Iraq's economy. Since Hussein's removal, the United States has spent billions of dollars to revive Iraq's oil industry. By March 2004 Iraq was producing about 2.5 million barrels of oil per day, nearly as much as it produced prior to the 2003 war, yet far below production capabilities. The U.S. expenditures were also aimed at restoring and upgrading Iraq's oil fields and refineries. Much of the work was contracted to U.S. and other foreign oil companies, as Hussein's departure also marked the shift from a state-run economy to a market economy.
Many factors have prevented Iraq from reaching projected production amounts. Reports of corruption and mismanagement abound. Additionally, recent investigations conclude that smuggled oil revenues provide a source of funding for insurgent forces. Indeed the greatest obstacle to a renewed and viable industry is security. Until Iraqis control sabotage and smuggling, they will not reap the full potential of this valuable resource.
1. What was the impact of other nations owning Iraq's oil resources? Of Iraq taking control of these resources?
2. Do all Iraqis benefit equally from the nation's oil wealth? How has this division occurred and what is the impact?
3. How is oil symbolic of the broader economic and political policy of the government at each stage of Iraq's history in the last century?
4. Is it good that the United States has allowed so much foreign investment to rebuild Iraq's oil industry?
5. Why did Saddam Hussein nationalize the oil industry in 1972?
6. How is economic security and success tied to the political situation in each historic period?
- Yergin, Daniel. The Prize. New York: Simon and Schuster, 1991.