Oil’s Not Well in Iraq

On March 27, 2003, Paul Wolfowitz, then deputy secretary of defense, predicted that Iraq’s oil revenue would “finance” its reconstruction and do so “relatively soon.” With wise investment and management, Wolfowitz might have been right. Even though its oil sector accounts for 95 percent of the Iraqi state’s revenue and is essential to the country’s ability to one day pay its own way, the United States has yet to make a serious effort to boost the Iraqi oil industry, which controls the second or third largest reserves (mostly undeveloped) in the world. President George W. Bush’s recent Iraq plan is no better in this regard.
Despite Iraq’s violence and political difficulties, its oil revenue has grown about 30 percent each year since 2004, topping $30 billion in 2006. This achievement, however, was due mostly to high oil prices, which, as the recent broad price drop indicates, cannot be counted on in the future. According to State Department figures, production has been stagnant at 2.1 million barrels per day, or 400,000 barrels per day below the immediate prewar peak (which was matched for a few months in 2004). The shortfall from even this modest target represents a loss of over $7 billion annually (based on $50 per barrel of Iraqi oil) and about 15 percent of unused, or spare, global oil production capacity (a significant amount in a still tight market).
Many in and out of government accept the conventional wisdom that security problems are to blame. Indeed, security problems have contributed to smuggling …