Monday, November 28, 2011

How Iraq’s Oil Plans May Set Back The Country’s Economy

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. 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, 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.
(Inter-Agency Information and Analysis Unit)
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.


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


buddyglass said...

That Iraq's oil industry primarily enriches the government needn't be a bad thing, depending on what the government does with the money. Most likely it will do something inefficient and non-beneficial, but one can imagine some alternatives. For instance, it might use the oil money to offset tax revenue and simply lower taxes on individuals. Possibly in a progressive fashion. Or it might lower the taxes it levies on non-oil businesses in order to encourage diversification. Or it might establish a top-notch national university and provide scholarships for bright young Iraqis to attend. It might use the money to hire private sector firms to repair and modernize the country's damaged infrastructure.

Joel Wing said...

Buddy the problem is that the Iraqi government is highly inefficient, corrupt, and run in a top-down fashion. Under the Baathists they modeled the bureaucracy after the Soviets, and this has largely persisted to the present day. To get a Visa for example requires the signature of the Interior Minister himself, which is currently Premier Maliki. As for taxes and fees, from what I've read many people and businesses simply do not pay them either by ignoring them or paying bribes to get around them. Most Iraqis do not pay their electricity bills for example. Iraq also had a massive brain drain after the 2003 invasion and many people left/were forced out by deBaathification so the government also lacks a lot of trained staff. The government can't handle the money that it currently receives, and is largely incapable of investing most of its funds effectively. Those are the reasons for my pessimism.

buddyglass said...

I share your pessimism. My point is only that "oil money going primarily to the government" isn't the problem per se, since it's theoretically possible for that money to be spent in ways that benefit the citizenry. The problem is that the government in question is corrupt and inefficient. If the money didn't go to the government it would probably go straight into the pockets of a small cadre of extremely wealthy individuals, and that assumes it even stays in the country; it might go to foreign oil companies. Either way, the average Iraqi doesn't derive much benefit.

Joel Wing said...

Yes agree with our points.