MEEA 15th International conference, Doha, March 23-26, 2016 Iraq: Oil Prices and Economic Management Joseph Sassoon ([email protected]) Abstract Iraq, undergoing transition politically and economically after the 2003 invasion, was blessed for a few years with rising oil prices, in addition to the huge amount invested by the US in the country. Yet, its economic management adversely suffered from endemic corruption and tremendous bureaucracy. Corruption reached such levels that Prime Minister Nuri al-Maliki was forced to resign when ISIL occupied parts of Iraq, and exposed the fallacy of large investments in building a strong Iraqi army. The paper begins by showing the utter dependency of the country (more than anywhere in MENA) on oil: non-oil sector constitutes barely 10% of the total GDP, and non-oil tax revenues are merely 2%. It proceeds to focus on how corruption prevented the country from benefiting from high oil prices. It addresses how the new government of Haidar al- Abadi is facing the mammoth task of reducing corruption while simultaneously fighting ISIL, all in an environment of low oil prices. The paper will underline how budget allocations were cut as a result of lower revenues in the last eighteen months. Needless to say, this is negatively impacting infrastructure development and having adverse socio- economic implications (for instance, brain drain has intensified in the last six months as a result of lack of opportunities.) Finally, the paper will deal with oil exploration in the country (ex-Kurdistan) and what the future of Iraq’s economy in the current environment of low oil prices. Overall, an important theme of the paper is to show how high oil prices and huge inflow of cash did not provide the panacea for Iraq’s economy in the decade following the invasion, and raises the question whether actually in this harsh atmosphere, the mangers of Iraq’s economy will be pushed to find durable solutions for their country rather than simply rely on exports from oil. A recent article in the New York Times carried the headline: “Iraq’s New Threat: Calamity from Falling Oil Prices,” and informed the readers that tough times lie ahead of the Iraqi people, and quoted Iraqi sources that warned that cutting salaries and pensions could sever “the last link between citizen and state.”1 What the newspaper did not tell its readers is what happened when oil prices reached $140. This paper will begin by showing 1 Tim Arango, “Iraq’s New Threat: Calamity from Falling Oil Prices,” New York Times, February 1, 2016. 1 the utter dependency of Iraq on oil, and then proceeds to analyze how the mismanagement of the economy prevented any bonanza form the high oil prices that prevailed for a number of years. Iraq is more dependent on oil than any other country in Middle East and Africa (MENA); oil production account for two-thirds of the country’s GDP almost 95 per cent of government revenues, and a staggering 99 per cent of total exports. With a breakeven oil price of $102 per barrel in 2012, which is among the highest in the region, Iraq is very vulnerable to a fall in oil prices. At the same time, the high level of current spending makes it difficult to adjust to external shocks without disproportionately cutting investment spending (IMF 2013: 14). A critical element for Iraq’s economy is that while the country is dependent on oil and 97 per cent of the state revenues are from oil, the sector employs only 80,000 workers out of a total of eight million in the labour force, roughly a total of 1 per cent of the total work force (United Nations Joint Analysis Unit 2014: 4, 6). This leads to the fact that unemployment in Iraq, as in many other countries in the region, is a serious challenge for the country and its economy. Iraq, as with many other countries in the region, is not managing to address the issue of unemployment in spite of its wealth. There is a wide divergence of statistics about unemployment, but suffice to say that unemployment hovers around 18 per cent with higher unemployment rates for those aged 15–29. Female employment is probably around 14 per cent, which is low compared to most other countries in the region (20 per cent in MENA and 37 per cent in Low and Middle Income Countries). To put these statistics in context, Iraq is the third largest Arab country in terms of population with roughly 34 million. Its population is growing at 1.8 per cent and roughly 58 per cent of the population is under 24. Similar to other countries in the region, the public sector is the major outlet for absorbing huge numbers of young graduates to the extent that army and security services have returned to the levels of the 1980 Iran–Iraq War with more than one million members. 2 Table 1: Iraqi Exports and Imports vs. Oil Prices, 2003-2014 2003 2005 2007 2009 2011 2013 2014 Total Iraqi $9.71 $23.70 $39.59 $39.43 $79.68 $89.77 $83.98 Exports Billion Billion Billion Billion Billion Billion Billion in US$a Total Iraqi $9.93 $23.53 $19.56 $41.51 $47.80 $59.35 $53.18 Imports Billion Billion Billion Billion Billion Billion Billion in US$b Brent Crude $28.85/ $38.26/ $72.44/ $61.74/ $111.26/ $108.56/ $98.97/ Oil Price Barrel Barrel Barrel Barrel Barrel Barrel Barrel in US$c Sources: a) Iraqi Central Bank. https://www.cbi.iq/documents/Binder12_f.pdf. b) Iraqi Central Bank. https://www.cbi.iq/documents/Binder12_f.pdf. c) U.S. Energy Information Administration. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rbrte&f=a As illustrated in table one, Iraqi export revenue tracked oil prices closely between 2003 and 2014, underscoring the importance of oil to Iraq’s export economy. During periods of high oil prices, export revenues rose. Iraqi spending on imports remained largely detached from oil prices, but declined in 2014 in tandem with the recent oil price drop. Table 2: Iraq’s Reserves and Current Account Balances, 2005-2014 2005 2007 2009 2011 2013 2014 Iraq Total reserves (includes gold, current $12.20 $31.50 $44.30 $61.00 $77.70 $66.40 US$) Billion Billion Billion Billion Billion Billion Iraq Current account balance (BoP, current ($3.34) $15.52 ($1.13) $26.13 $7.90 ($11.90) US$) Billion Billion Billion Billion Billiona Billiona Source: World Bank, World Development Indicators, Iraq. http://data.worldbank.org/data-catalog/world- development-indicators. 2013 and 2014 Current Account Balance data from Iraqi Central Bank Annual Economic Report 2014. https://www.cbi.iq/documents/AnnualEconomic_report%202014_f.pdf, p. 4. 3 Iraqi total reserves and current account balance also reflect the impact of oil on the financial health of the country, as illustrated in Table 2. Iraq’s current account balance increased to $26.13 billion in 2011, a record high year for oil prices, but fell to -$11.90 billion in 2014 due in part to the steep fall in oil prices during the latter half of the year. Iraq’s total reserves mirror the change in current account balance. Table 3: Iraq’s Oil Production and Oil Exports in 2015 Month (2015) Iraq Crude Oil Iraq Crude Oil Iraq Crude Oil Export Revenues Exports (‘000 Production (US$) barrels/day) (‘000 barrels/day January $3.26 Billion 2,535 3,042 February $3.40 Billion 2,981 2,783 March $4.48 Billion 3,077 3,339 April $4.79 Billion 3,145 3,176 May $5.45 Billion 3,187 3,288 June $5.29 Billion 3,187 3,591 July $4.84 Billion 3,105 3,718 August $3.93 Billion 3,079 3,760 September $3.73 Billion 3,052 3,755 October $3.29 Billion 2,708 3,659 November $3.66 Billion 3,365 3,747 December $2.92 Billion 3,270b 4,130a Sources: Export revenues from Ministry of Oil https://www.oil.gov.iq/index.php?name=Pages&op=page&pid=77. Production and export data from JODI Database http://www.jodidb.org/TableViewer/tableView.aspx?ReportId=57431. a) December 2015 production figure pulled from OPEC Monthly Oil Market Report January 2016. http://www.opec.org/opec_web/static_files_project/media/downloads/publications/MOMR%20January%2 02016.pdf, p. 69. b) December 2015 export figure taken from Reuters. See http://www.reuters.com/article/iraq-oil- idUSL8N14I1LX20151230. As Table 3 shows, Iraqi export figures for 2015 highlight the challenging dynamic that Iraq is facing. Despite increasing oil exports and production to near-record highs in 2015, Iraq’s export revenues were far lower than the previous year, and declined even further near the end of 2015. Whereas average monthly oil exports of 3.18 million barrels per 4 day (b/d) in May 2015 got Iraq $5.45 billion in revenues, by December revenues had nearly halved, despite an increase in exports of 83,000 b/d. Furthermore, Iraq had proportionally less oil to export as a percentage of its total production by the end of 2015, as the country started paying back international oil companies (IOCs) in oil due to cash shortages, which ultimately cut into oil export revenues. In March 2015, Iraq exported approximately 92 per cent of its overall production for that month. In October, Iraq exported only 74 per cent of its monthly production. Iraqi budget: Iraq’s 2015 budget was based on oil projections of $56 per barrel and an average export rate of 3.3 million b/d.2 According to the EIA, Brent Crude averaged $52.32 per barrel and WTI averaged $48.66 per barrel, significantly below the country’s forecasts.3 Iraq’s 2016 budget is based on estimates of $45 per barrel oil and an export rate of 3.6 million b/d.4 Brent crude averaged $30.70 per barrel in January 2016,5 well below Iraqi projections.