World Oil Markets and the Invasion of Iraq

[QuietStorm]

George W. Bush's regime-changing war in Iraq is widely seen as an oil war -- a grab for the second-largest petroleum reserves in the world. In the minds of many, this interpretation was confirmed when the United States pressed for, and secured, a UN resolution giving the US-British occupying authority control over expenditure of Iraq's oil revenues. Without a doubt, Washington does see a major role for foreign oil companies in the expansion of the Iraqi oil sector -- a vision it shares with senior officials in the Iraqi oil ministry. But calculations about "controlling" Iraqi oil figured most prominently in the strategic, rather than the merely commercial, thinking of the Bush administration about the invasion. Washington hawks saw a US-allied Iraq as an alternative to Saudi Arabia as the strategic supplier of oil to the United States.

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Saudi Arabia, home to the world's largest petroleum reserves, maintains its strategic importance -- especially to Washington -- by intervening in the market to ensure moderate prices for the world economy. This imperative must be balanced, however, with the Saudis' other key objectives of keeping a large market share for themselves and keeping prices high enough that other OPEC countries will not rebel.

Until 1995, Saudi Arabia was very concerned to protect its market share. The Saudis have bitter memories of the early 1980s, when they reduced their production to barely 2 million barrels per day (when they could have produced 10 million) to keep prices low. Other OPEC members did not make comparable sacrifices, and oil companies began to buy proportionally less oil from the Saudis. After Iraq invaded Kuwait and the UN embargoed its oil sales, the Saudis drew a "line in the sand," refusing to cut production or their OPEC quota under 8 million barrels per day (b/d). Part of this new share (up from the 5.6 million b/d it was allowed to produce before August 2, 1990) Riyadh had appropriated for itself from lost Iraqi output. Moreover, King Fahd's unequivocal support for US geopolitical interests led the Saudis to back a price range of $15-18 a barrel through 1995.

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