Oil Was Supposed to Rebuild Iraq

In theory, Iraq could raise the estimated $88 billion it says it needs to rebuild the country on its own in less than a year. 

In the lead-up to the U.S. invasion of Iraq 15 years ago, one factor in the debate was the notion that the the war would almost pay for itself. “The oil revenue of that country could bring between $50 [billion] and $100 billion over the course of the next two or three years,” Paul Wolfowitz, then the U.S deputy secretary of defense, told a congressional panel in March 2003. “We're dealing with a country that could really finance its own reconstruction, and relatively soon.” 

But 15 years later, Iraq has yet to fully rebuild after the American-led invasion, a civil war, and the ISIS takeover of large parts of the country, and has never been able to fund a substantial portion of the reconstruction itself. The country, OPEC’s second-largest producer of crude oil, pumps about 4.3 million barrels per day, of which it exports about 4 million daily. This, with oil at $66 per barrel, should be generating about $264 million in revenues for the country each day. If all of Iraq’s oil-export revenues were spent on reconstruction, the country could rebuild completely, even after all that, in a relatively short period. But things aren’t quite that simple.

For one, the UN estimates that 99 percent of Iraq’s revenue comes from oil. That essentially means that oil has to pay for everything from salaries for government workers to infrastructure projects and defense spending. And given the amount lost to corruption, there is little money left over do anything else.

This is despite the fact that Iraq’s oil industry has been one of the relative success stories following the war. If anything, it has shown one of the most impressive turnarounds of any sector following the U.S.-led invasion of the country in 2003 that ended up ousting Saddam Hussein. But while there is much to be optimistic about in the country, Iraq remains riven by factionalism; its neighbors have an outsized influence in its domestic politics; and terrorist groups, though weakened, can still pull off attacks—even with the lingering presence of U.S. troops. All of these factors remain hurdles standing between Iraq, its oil-production targets, and its goal of becoming a stable country after years of war. 

Iraq is believed to have more oil than any other country in the world, save Saudi Arabia. But years of UN-backed sanctions, prompted by Iraq’s invasion of Kuwait in 1990, had by 2003 crippled the oil sector. For a period in the 1970s, Iraq produced as many as 3.5 million barrels per day and used that revenue to dramatically raise living standards. The eight-year war with Iran changed that; the invasion of Kuwait, and the ensuing international sanctions, reversed it.

In the year after the invasion of Kuwait, Iraq’s oil output fell 85 percent. UN sanctions meant it couldn’t export oil until 1996. But under the UN’s so-called oil-for-food program, Saddam could only export oil in exchange for humanitarian aid. This changed after 2003, with Saddam gone and oil revenue being seen as pivotal to rebuilding the country. The sanctions were lifted, and international companies such as Exxon Mobil and Total entered Iraq and began using their expertise to develop Iraq’s vast oilfields and, ultimately, to pump oil. Their return to the country, and with it the return of significant oil production, seemed a hopeful sign that oil could in fact help the country rebuild, just as Wolfowitz expected.

But those economic goals clashed with the political realities that faced Iraq almost immediately. A brutal sectarian conflict followed the U.S. invasion, and just when it seemed Iraq would recover, ISIS blitzed its way through large portions of the country, seizing Mosul, the second-largest city, as well as other urban centers. The Iraqis, with the support of the U.S. and Kurdish fighters, ultimately defeated the jihadists last fall, but many of the areas that saw fighting were once again destroyed, and once again will need to be rebuilt.

And indeed the question of oil revenues itself is helping fuel some of the instability. Prime among them is the Iraqi government’s fight with the Kurdistan Regional Government (KRG) over oil in northern Iraq. The Kurdish zone of Iraq’s northeast has its own government, which operates autonomously from Iraq’s central government in Baghdad. The dispute has already drawn in Turkey and Iran, each of which supports rival political factions in the KRG, but neither of which wants to see an independent Kurdish homeland in northern Iraq. Turkey is wary that an empowered Iraqi Kurdistan could embolden separatist Kurds in its own country; Iran sees Iraq, which like Iran is predominantly Shia, as part of its sphere of influence.

The Kurds voted in an independence referendum last fall—one Baghdad promptly tried to quash by retaking control of the oil-rich area of Kirkuk. The Kurds see it as theirs, having pushed ISIS out of the area after Iraqi troops there fled the ISIS onslaught in 2014. The U.S. has been trying to mediate the dispute, with limited success. To make matters worse, earlier this month, the Iraqi parliament passed a budget that cuts the KRG’s share of the national budget to 12.5 percent from 17 percent. This would mean a commensurate decline in oil revenues for the KRG, despite the significant oil revenues on KRG territory.

Oil fields in the KRG’s control produce about 15 percent of total Iraqi oil, but the regional government and the government in Baghdad have for more than a decade disputed who controls the oil fields in Kurdistan. For the last several years, the KRG has sold much of the oil it produces on its own, over the objections of Baghdad. After Iraq forces took Kirkuk last fall, the dispute became one of how oil from the KRG would be exported and marketed. Thus oil revenues themselves, far from rebuilding the country, are at the center of a dispute that could tear it apart further. Al Monitor, the news website devoted to the Middle East, noted that this budget dispute could become “a bargaining chip or part of the political agreements” that will follow national elections in May.

But as John Cassidy wrote in The New Yorker in July 2003: “[T]he harsh fact remains that oil revenues alone cannot transform Iraq into a wealthy Gulf nation, like Kuwait or the United Arab Emirates, both of which have much smaller populations. … If Iraq is to prosper during the decades ahead, it will have to use its oil revenues to diversify its economy and generate other sources of income, something that will be possible only if Iraq is transformed into a peaceful, stable land with an effective and legitimate leadership.”

That statement is as relevant now as it was 15 years ago.