The issue of oil access has come up recently from our own pgl (See here ) and also Mark Thoma (See here ) both citing comments about Bush’s press conference today where the subject never came up. There are two parts to the question: access to oil revenue by Iraqis and access to oil itself by customers. pgl gives the standard economic answer to the second question – you buy the oil on the market – and I already commented on his post by saying that one thing I have confidence in is that whoever owns Iraq will sell the oil because that is the way you get rich quick which is what politicians always want.
But then I thought again and it seemed to me that there are some lessons from another oil fueled civil war in a country I have worked in a lot –
First, on the question of who gets the oil revenue inside the country, the Angolans fought over this for 25 years. The civil war was on again and off again but the problem was always that the prize for winning was huge ($2 billion/year more or less) and nobody trusted the other parties to honor any revenue sharing agreement. So they fought on and on and on until one side won a military victory over the other. All during this quarter century they did indeed keep on pumping the oil – and that meant that they could afford serious hardware to blow up the whole country since one side had oil and the other diamonds. At the end of it they have several cities that look like WW2 just ended and a completely destroyed infrastructure.
Would the Iraqis be any different? Suppose there were some formula worked out for oil revenue. Would the Sunnis trust the Shias to honor it or vice versa? Would the Kurds? Maybe, but there is also a very big chance that they would just fight it out as the Angolans did because the prize is so very big, not just monetarily but also politically and socially.
And as for Bush’s opinion on this, I have more than a sneaking suspicion that they are really interested in maintaining access for their oil industry cronies. Mightn’t the Iraqis look to some other country for oil engineering expertise if the
On the customer side there is little doubt at the present time that the oil market is indeed a market and what one needs to get oil is hard currency. But it is worth remembering that it hasn’t always been this way. Thirty some years ago we went through a crisis where oil was NOT allocated by the market but was distributed on an administrative basis for political reasons – we were embargoed. It would be silly to imagine that it would be impossible for something that happened before to happen again. So here the Bushies may be less nuts than an economist would think. Certainly the Chinese think there is value in securing access to oil in the future – This is why they have lent or promised the Angolans almost $10 billion in oil backed loans – If oil is market allocated when the loans come due in the future then the Chinese are in good shape because they already have a contract for it. If not then the Chinese are still in good shape because they have bought one hell of a lot of good will by giving the Angolans a huge amount of money right up front.