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How Iraq’s Oil Plans May Set Back The
Country’s Economy
29.11.2011
By Joel Wing - ekurd.net |
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November 29, 2011
Iraq is rich in resources, but is still a relatively
poor country. It suffers from high unemployment,
underemployment, and poverty. This is despite the
fact that it has some of the largest oil reserves in
the world. The government has massive plans to
develop that resource in the next few years, which
could make it a major player in the world energy
market. At the same time, those same plans could
continue the impoverishment of the nation.
Oil dominates all sectors of the Iraqi economy. It
accounts for 60% of the GPD, 99% of imports, and 90%
of government revenue. That makes Iraq the most oil
dependent country in the region. Iraq has 143
billion barrels of proven petroleum reserves, and
could have as much as 200 billion. The bulk of those
assets are in six major oil fields in southern Iraq.
Rumaila has 35.75 billion barrels in reserves, West
Qurna 1 15.6 billion, Majnoon has 14.8 billion, West
Qurna 2 has 12.4 billion, Zubair 6.75 billion, and
Halfaya 4.0 billion barrels. Currently, the country
produces around 2.6 million barrels a day, and
exports just over 2 million barrels. In 2009, the
government held two bidding rounds to allow foreign
companies to return to the industry after being shut
out for almost two decades, because of international
sanctions.
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As a result of their work, the Oil Ministry has
plans to boost sales to 2.75 million barrels by next
year. Ultimately, it wants to achieve 12 million
barrels a day in capacity in seven years, although
the ability to do that is widely questioned. Oil
Minister Abdul Karim Luaibi now thinks 8 million
barrels a day in capacity is more realistic, while
analysts think that it may achieve 6-7 million
barrels. Whatever the actual number proves to be,
Iraq can be expected to see a dramatic increase in
its profits from around $75 billion currently, to
possibly $150 billion by 2016 if prices remain over
$100 per barrel of petroleum. If achieved, that
would make Iraq one of the largest oil producers in
the world. That would give it great influence in
OPEC, and over world energy policy. At the same
time, it would make the country even more dependent
upon petroleum.
The oil industry, as currently structured, distorts
the rest of the economy to the detriment of the
population. First, large oil revenues lessons the
drive to diversify the economy. Iraqi politicians
have constantly talked about reforming the economy,
promoting the private sector, and encouraging new
businesses. Those plans have been mostly just words.
Baghdad could use its oil money to fuel the
expansion of the private sector, but since the
government earns so much off of petroleum, it has
largely focused just upon that sole industry, and
neglected the rest of the economy. Government
regulations on companies for example, are time
consuming and costly, and are the main reason why
the World Bank has ranked Iraq one of the worst
places to do business over the law few years.
Baghdad has done little to nothing to improve this
environment. This is one factor accounting for the
high unemployment rate, because while oil generates
large profits, it only accounts for 1% of Iraqi
jobs. Second, oil revenues have increased the
exchange rate for the Iraqi dinar. That makes it
harder to export non-oil products, because they are
more expensive, while making it easier to purchase
imports. Cheap foreign goods have flooded the
country since the 2003 invasion, to the detriment of
many Iraqi businesses. This is another reason why
the economy is not producing enough jobs to employ
the growing population, and reduce poverty. Third,
Baghdad has tried to make up for the first two
problems by employing a large public sector.
Since the Baath Party days, Iraq has had a
semi-socialist economic system. That makes the
government the largest employer in the country. It
employs 43% of all workers, provides almost 60% of
full-time work, and 70% of income in the country is
linked to the government. Many of these jobs are
useless, and act more as a form of welfare than
productive work. In state-run companies for
instance, it’s normal for them to be staffed ten
times more than is needed. The number of public
employees has also doubled since 2005, giving Iraq
one of the largest public sectors in the world as a
percentage of population. That takes a huge part of
the annual budget to pay for salaries and pensions.
Not only that, but it pushes out private sector job
creation. Government jobs are far more stable,www.ekurd.net
and pay more than private ones. That leads to people
to search for jobs in the civil service, rather than
with businesses. Last, oil brings in more money than
the government can effectively manage. Baghdad has
signed a number of huge deals to build power plants
to boost electricity output, but few of these have
come to fruition, because the country lacks the
bureaucrats to manage them, and the banking acumen
to manage them. Each year the government also ends
up with a sizeable budget surplus, because it cannot
effectively invest its funds. All of these trends
will increase when Iraq expands its oil sector. The
government will get even more money, which it will
pump into public jobs to make up for the fact that
it has a small private sector that it is not
supporting. That will distort the labor market, and
continue with the high poverty rates.
Iraq has the potential to become an oil superpower.
It is expanding and repairing its petroleum
infrastructure, and plans on bringing in more
foreign companies next year. That would seem to be
beneficial for the country, and offer wealth to the
entire nation. Instead, the boost in the petroleum
industry will enrich the government, which has
proven incapable of managing its funds. More useless
government jobs will be created, more large
development projects will be announced with many
failing to come to fruition, and there will be even
less reason for the authorities to push the private
sector. This could be changed if the government
would plan for the long-term and see the necessity
to diversify, but instead it seems to be more
concerned with increasing oil production to as high
a level as possible as quickly as it can. This
short-term thinking is just another reason for the
current state of the economy, and the chronic
problems it faces.
SOURCES:
Carey, Nick and Kami, Aseel, “Iraq to keep on
pursuing economic reforms, says Araji,” Reuters,
4/25/10
Cordesman, Anthony, “The Changing Situation in Iraq:
A Progress Report,” Center for Strategic and
International Studies, 4/4/09
Hafidh, Hassan, “UPDATE: Iraq Plans To Export 2.75M
B/D In 2012 Vs 2.2M B/D 2011-SOMO,” Dow Jones,
11/23/11
Ideas Synergy, “Private Sector in Iraq: Creating
Jobs and Enhancing Sustainable Development?” Iraq
Insights, July 2011
Ibrahim, Haider, “Parliamentary committee blames
government for dwindling local production,” AK News,
6/30/11
Inter-Agency Information and Analysis Unit, “Oil and
Gas Factsheet,” October 2011
Lawler, Alex and El Gamal, Rania, “UPDATE 2-Iraq may
cut oil output capacity goal –minister,” Reuters,
6/7/11
McArdle, Megan, “Doing Business In Iraq,” Atlantic,
2/10/11
Joel Wing, with an MA in International Relations,
Joel Wing has been researching and writing about
Iraq since 2002. His acclaimed blog, Musings on
Iraq, is currently listed by the New York Times and
the World Politics Review. In addition, Mr. Wing’s
work has been cited by the Center for Strategic and
International Studies, the Guardian and the
Washington Independent. You may visit his Blog
Musings On Iraq at musingsoniraq.blogspot.com
Copyright © 2011 ekurd.net
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