OPEC ON THE MARCH Why Iraq still sells its oil à la cartel By

HARPER'S MAGAZINE / APRIL 2005, pp. 74-76

Two years and $154 billion and given that OPEC states ac- volve into mass cheating and over- into the war in Iraq, the United count for 46 percent of America's production, oil prices would fall States has at least one significant oil imports, it may seem odd that over a cliff, and Saudi Arabia-both new asset to show for it: effective the United States' "remaking" of economically and politically- membership, through our control Iraq would allow for a national oil would fall to its knees. of Iraq's energy policy, in the Or- company that props up OPEC's By February 2003, Cohen's ganization of the Petroleum Ex- price gouging. And in fact the position had been enshrined as porting Countries (OPEC), the original scheme for reconstruction, official policy, in the form of a Arab-dominated oil cartel. at least the one favored by neocon- hundred-page blueprint for the Just what to do with this servatives, was to privatize Iraq's occupied nation titled, "Moving proxy power has been, almost oil entirely and thereby undermine the Iraqi Economy from Recovery since President Bush's first inaugu- the oil cartel. to Sustainable Growth"-a plan that ral, the cause of a pitched battle One intellectual godfather of generally embodied the principles between neoconservatives at the this strategy was Ariel Cohen of for postwar Iraq favored by De- Pentagon, on the one hand, and the the Heritage Foundation, who in fense Secretary Donald Rumsfeld, State Department and the oil in- September 2002 published (with Deputy Secretary Paul Wolfowitz, dustry, on the other. At issue is Gerald P. O'Driscoll, Jr.) a post- and the Iran-Contra figure Elliott whether Iraq will remain a member invasion plan, "The Road to Eco- Abrams, now Deputy National in good standing of OPEC, up- nomic Prosperity for a Post- Security Adviser. holding production limits and Saddam Iraq," that put forward the Nominally written by a thereby high prices, or a mutinous idea of using Iraq to smash OPEC. committee of Defense, State, and spoiler that could topple the Arab Cohen recently explained to me Treasury officials, the blueprint oligopoly. how such an extraordinary geopo- was in fact the brainchild of a pla- According to insiders and to litical feat might be accomplished. toon of corporate lobbyists, chief documents obtained from the State OPEC maintains high oil among them the flat tax fanatic Department, the neocons, once in prices by suppressing production Grover Norquist. From overhaul- command, are now in full retreat. through a quota system effectively ing tax rates to rewriting copyright As of today, Iraq's system of oil imposed on each member by Saudi law, the document mapped out a production, after a year of failed Arabia, which reigns by dint of its radical makeover of Iraq as a free- free-market experimentation, is overwhelming reserves. market Xanadu-a sort of Chile on being re-created almost entirely on The Saudis, to maintain their the Tigris-including, on page 73, the lines originally laid out by control on pricing, must keep a lid the selloff of the nation's crown Saddam Hussein. Even Hussein's on production from other mem- jewels: "privatization ... [of] the oil Baathist technocrats are back at the bers-particularly Iraq, which has and supporting industries."! helm of the Ministry of Oil and the the second greatest proven re- Following the U.S. military's State Oil Marketing Organization. serves. Under Saddam Hussein, swift advance to Baghdad, those Under the quiet direction of Iraq adhered to the OPEC quota skeptical of the neocon plan were U.S. oil company executives work- limit (historically set to equal summarily brushed aside. Chief ing with the State Department, the Iran's, now 3.96 million barrels a among the castoffs was General Iraqis have discarded the neocon day) via state ownership of all , the short-lived occupa- vision of a laissez faire, privatized fields. Cohen reasoned that if tion viceroy who on the very night oil operation in favor of one shack- Iraq's fields were broken up and he arrived in Baghdad from Ku- led to quotas set by OPEC, which sold off, a dozen competing opera- wait received a call from Rumsfeld have been key to the 121 percent tors would quickly crank up pro- informing him of his dismissal. rise in oil prices since the begin- duction from their individual When I met with Garner last ning of 2002. This rise is estimated patches to the maximum possible, March at the Washington offices to have cost the U.S. economy 1.2 swiftly raising Iraq's total output to of Sy Coleman, the giant security percent of its GOP, or a fourth of 6 million barrels a day. This extra firm he now heads, he told me that its total growth during that period. crude would flood world petro- he had resisted imposing on Iraqis Given this economic blow, leum markets, OPEC would de- the plan's sell-off of assets, espe- cially the oil. "That's just one fight heard from since.) Roughly six ary of the Halliburton Corporation. you don't have to take on right months before the invasion, the McKee had little tolerance for the now," he said. "You don't want to Bush Administration designated neocons' threat to privatize the oil end the day with more enemies Philip Carroll to advise the Iraqi fields. A close associate of than you started with." Oil Ministry once U.S. tanks en- McKee's and the executive adviser In plotting the destruction of tered Baghdad. Carroll had been to Hess's trading arm, Ed Morse, OPEC, the neocons failed to pre- CEO of both Fluor Corporation, told me that "Rob was very promo- dict the virulent resistance of in- now a major contractor in Iraq, tive of putting in place a really surgent forces: the U.S. oil indus- and, earlier, of Royal Dutch/Shell's strong oil company," even if he try itself. U.S. division. In May 2003, a had to act over the objections of From the outset of the plan- month after his arrival in Iraq, the Iraqi Governing Council. ning for war, U.S. oil executives Carroll made headlines when he Morse, who says he takes as many had thrown in their lot with the told the Washingron Post that Iraq as six calls a day from the Bush pragmatists at the State Depart- might break with OPEC: "[Iraqis] Administration regarding Iraq, is ment and the National Security have from time to time, because of one of the men to whom Washing- Council. Within weeks of the first compelling national interest, ton turns to obtain the views of Big inaugural, prominent Iraqi expatri- elected to opt out of the quota sys- Oil. Like Carroll and McKee, ates- many with ties to U.S. indus- tem and pursue their own path .... Morse sneers at what he calls "the try- were invited to secret discus- They may elect to do that same obsession of neo-conservative sions directed by Pamela Quanrud, thing. To me, it's a very important writers on ways to undermine an NSC expert now national question." Carroll later OPEC." Iraqis, says Morse, know employed at State. "It quickly be- told me, though, that he personally that if they pump 6 million barrels came an oil group," one partici- would not have been supportive of a day, i.e., 2 million above their pant, Falah Aljibury, told me. Al- privatizing oil fields. "Nobody in expected OPEC quota, "they will jibury, an adviser to Amerada their right mind would have crash the oil market" and bring Hess's oil trading arm and to in- thought of doing that," he said. down their own economy. vestment banking giant Goldman Soon after Carroll resigned In November 2003, McKee Sachs, who once served as a back his post in September 2003, the quietly ordered up a new plan for channel between the United States new provisional government ap- Iraq's oil. The drafting would be and Iraq during the Reagan and pointed an oil minister, Ibrahim overseen by a "senior adviser," George H. W. Bush administra- Bahr al-Ulourn. Uloum (who had Amy Jaffe, who had worked for tions, cut ties to the Hussein re- been maneuvered into the job by Morse when he held the formida- gime following the invasion of then-neocon favorite Ahmad ble title of Chairman of the Coun- Kuwait. Chalabi) quickly fired Muhammad cil on Foreign Relations-James The working group's ideas al-Jiburi, chief of Iraq's State Oil Baker III Institute Joint Committee about the war had been far less Marketing Organization, and on Petroleum Security. Jaffe now starry-eyed than those of the neo- Thamer Ghadhban, the expert in works for Baker, the former Secre- cons. "The petroleum industry, the charge of the southern oil fields, tary of State, whose law firm chemical industry, the banking both of whom had been trusted by serves as counsel to both Exxon- industry-they'd hoped that Iraq the Western oil industry. Mobil and the defense minister of would go for a revolution like in Production faltered from a Saudi Arabia. The plan, nominally the past and government was shut combination of incompetence, written by State Department con- down for two or three days," Al- wholesale theft (Iraq's oil was un- tractor BearingPoint, was guided, jibury told me. "You have a mar- metered), sabotage, and corruption says Jaffe, by a handful of oil in- tial law ... and say Iraq is being that one oil man told me was dustry consultants and executives. liberated and everybody stay "rampant," with "direct payoffs to For months, the State De- where they are ... Everything as government officials by commer- partment officially denied the exis- is." On this plan, Hussein would cial operators." tence of this 323-page plan for simply have been replaced by With pipelines exploding Iraq's oil, but when I identified the some former Baathist general. daily, the fantasy of remaking document's title from my sources One candidate was General Iraq's oil industry also went up in and threatened legal action, I was Nizar Khazraji, Saddam's former flames. Carroll was replaced by able to obtain the complete report, army chief of staff, who at the time another Houston oil chieftain, Rob dated December 2003 and entitled was under house arrest in Denmark McKee, a former executive vice- Options far Developing a Long pending charges for war crimes. president of ConocoPhillips and Term Sustainable Iraqi Oil Indus- (Khazraji was seen in Iraq a month currently the chairman-even during try. The multi-volume document after the U.S. invasion, but he soon his tenure in Baghdad-of Enven- describes seven possible models of disappeared and has not been ture, an oil-drilling supply subsidi- oil production for Iraq, each one merely a different flavor of a sin- approaching the $50- a-barrel minister of trade, and Thamer gle option: the creation of a state- mark all year, the major U. S. oil Ghadhban, now oil minister. owned oil company. companies posted record or near And Dick Cheney, far from The seven options ranged record profits. ConocoPhillips, "putting the squeeze on OPEC," from the Saudi Aramco model, in Rob McKee's company, this Feb- has taken a de facto seat there, which the government owns the ruary reported a doubling of its allowing the cartel to maintain its whole operation from reserves to quarterly profits from the previous own, suffocating grip on the U.S. pipelines, to the Azerbaijan model, year, which itself had been a com- economy. in which the state-owned assets are pany record; Carroll's former em- operated almost entirely by "IOCs" ployer, Shell, posted a record- (International Oil Companies). breaking $4.48 billion in fourth- The drafters had little regard quarter earnings. for the "self-financing" system, ExxonMobil last year re- such as Saudi Arabia's, which bars ported the largest one-year operat- IOCs from the fields; they prefer ing profit of any corporation in the production-sharing agreement U.S. history. (PSA) model, under which the When I talked to Ariel Cohen state maintains official title to the at Heritage, his dream of smashing reserves but operation and control OPEC in shambles, he blamed the are given to foreign oil companies. State Department for acquiescing These companies then man- to the Saudis and to Russia, which age, fund, and equip crude extrac- also benefits from selling oil at tion in exchange for a percentage high OPEC prices. of sales receipts. While promoting The poisonous policies were IOC control of the fields, the influenced, he said, by "Arab authors take care to warn the Iraqi economists hired by the State De- government against attempting to partment who are basically sup- squeeze IOC profits: "Countries porting the witches' brew of the that do not offer risk-adjusted rates Saudi royal family and the Soviet of return equal to or above other ostblock ... because the Saudis are nations will be unlikely to achieve interested in maximizing their significant levels of investment, market share and they're not inter- regardless of the richness of their ested in fast growth of the Iraqi geology." Indeed, to outbid other output." nations for Big Oil's favor will According to Morse, the require Iraq to turn over quite a switch to an OPEC-friendly policy large share of profits, especially for Iraq was driven by Dick when· competing against countries Cheney himself. 'The person who such as Azerbaijan that have given is most influential in running away the store. The Azeri govern- American energy policy is the ment, notes the report, has "been Vice President," who, says Morse, able to partially overcome their "thinks that security begins by ... risk profile and attract billions of letting prices follow wherever they dollars of investment by offering a may." contractual balance of commercial Even, I asked, if those are ar- interests within the risk contract." tificially high prices, set by This refers to the fact that Azerbai- OPEC? "The VP's office [has] not jan, despite its poor oil quality and pursued a policy in Iraq that would poor location, drew in the IOCs via lead to a rapid opening of the Iraqi scandalous splits of revenue al- energy sector ... so they have not lowed by the nation's corrupt gov- done anything, either with produc- ernment. ers or energy policy, that would Given how easily the inter- put us on a track to say, 'We're ests of OPEC and those of the going to put a squeeze on OPEC.'" IOCs can be aligned, it is certainly Today, the old interim oil understandable why smashing the minister, Uloum, has been re- oil cartel would not strike oilmen placed by the very men he re- as a good idea. In 2004, with oil moved: Muhammad al-Jiburi, now