The calamity of Iraq has not even won us cheap oil
Geoffrey Wheatcroft
Friday November 2, 2007
Although "the judgment of history" has a sonorous ring, it doesn't necessarily require the long gestation that phrase might imply: sometimes there's no need for the owl of Minerva to hang around waiting for the sun to go down. When one eminent historian, Sean Wilentz of Princeton, pronounces bluntly that George Bush the Younger is "the worst president in American history", and another, Tony Judt of New York University, calls the Iraq war "the worst foreign policy error in American history", not many of us will argue with them.
And yet history still doesn't know the half of it. It has long since ceased to be a matter for debate that the Iraq adventure began in mendacity and ended in calamity. Sir Richard Dearlove's public penitence this week merely confirmed what he had already said privately, and not only has every single one of the original official reasons for the invasion been falsified, they have all been stood on their heads. Now even what many suspected was the ulterior motive - a war for oil - has gone awry
Speaking at the LSE on Wednesday, Dearlove said the government had put "too much emphasis on intelligence" as a justification for the war in order to win parliamentary support. But even before the notorious specious dossiers were compiled - which is what he meant - he had already said with deadly candour in the July 2002 memo, written in greatest secrecy by Dearlove as head of MI6 for the eyes of Blair and his colleagues, that a decision for war had been taken, and that "the intelligence and facts were being fixed around the policy".
He might have added that, while there were no "weapons of mass destruction" in Iraq, there was a great deal of noxious weaponry, which went missing at the time of the invasion and has since been put to dreadful effect. Nor were there any fundamentalist terrorists in Iraq five years ago - Saddam Hussein was a secular tyrant, and had a very short way with Islamic zealots - but today the country is awash with jihadists. Many of them come from Saudi Arabia, whose monarch we have just greeted in such obsequious fashion so that we can continue corruptly to sell his country arms.
As to the idea, flourished after the event by the dreaded liberal hawks as well as neoconservatives, that an invasion would bring democracy to Iraq, it's tempting to say that comment is superfluous. In fact there is still something to be said - and it was said by Jacques Chirac at a meeting with Tony Blair that has been described by Sir Stephen Wall.
While reiterating his opposition to the war that was about to begin, Chirac made a number of specific points. He reminded Blair that he and his friend Bush knew nothing of the reality of war but that he did: 50 years ago, the young Chirac served as a conscript in the awful French war in Algeria, which Iraq resembles in all too many ways. Then he said that the Anglo-Saxons seemed to think that they would be welcomed with open arms, but they shouldn't count on it. In a very percipient point, Chirac added that a Shia majority shouldn't be confused with what we understand as democracy.
He ended by asking whether Blair realised that, by invading Iraq, he might yet precipitate a civil war there. As the British left, Blair turned to his colleagues and said, doubtless with that boyish grin we happily see less of nowadays, "Poor old Jacques, he just doesn't get it." Well, who got it?
Even supposing that it had been possible to spread democracy at gunpoint, it's curious that anyone thought this would actually serve western interests. Reporting recently from Dubai under the droll headline "US promotes free elections, only to see allies lose", Hassan Fattah of the New York Times observed drily that "the paradox of American policy in the Middle East - promoting democracy on the assumption it will bring countries closer to the west - is that almost everywhere there are free elections, the American-backed side tends to lose". Well, yes.
Then there's Blair's apparently sincere belief that he had an obligation to follow Washington's lead, because "it would be more damaging to long-term world peace and security if the Americans alone defeated Saddam Hussein than if they had international support to do so", and that by offering such unconditional support he would "keep the United States in the international system". Absurd in any case as theory, this too has been drastically confuted by events.
As the hair-raising BBC programme No Plan No Peace has just confirmed beyond doubt, the British government had no influence whatsoever on American policy or conduct. Geoff Hoon, the defence secretary at the time of the invasion, has comically and humiliatingly contradicted himself as to whether he did or didn't oppose the crazy decisions to disband the Iraqi army - thereby setting loose large numbers of resentful armed fighters - and to dismiss all Ba'ath party members - thereby denuding the country of administrators. In any case, what is now quite clear is that his views didn't matter one way or the other. If London meekly agreed with Washington, the Americans went ahead; if London shyly expressed reservations, the Americans took no notice and still went right ahead.
Finally there is what has sometimes been dismissed as a conspiracy theory: that it was really a war for oil. This idea looks a little less cranky now that Alan Greenspan, the former head of the Federal Reserve Board, has acknowledged "what everyone knows: the Iraq war is largely about oil". But here again, there was no need to await his verdict. After all, the most powerful man in British politics had told us the same thing even before the war began. "The greatest thing to come out of this for the world economy," said Rupert Murdoch, "would be $20 a barrel for oil."
And so, on top of the whole list of false predictions and collapsed justifications, we have this final absurdity. As both Greenspan and Murdoch have very likely noticed, the price of oil hit a record $96 a barrel yesterday, and is still going up.
In April 2003, our previous prime minister confidently pronounced that "just as we had a strategy for war, so we have a strategy for peace". It is not pre-empting the judgment of history to say with even greater confidence that no good whatever has come out of this war, that no single good reason for it can any longer be adduced - and that "we" had never had any plan at all, not to say the faintest idea what "we" were doing.
Source: Guardian Unlimited
Gulf States and the Dollar Link
By ANDREW CRITCHLOW
November 2, 2007
DUBAI, United Arab Emirates -- Oil-rich Arab sheikdoms, risking new inflation pressure, followed the U.S. Federal Reserve's lead by lowering official interest rates to keep their currencies aligned with the dollar.
Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain followed the Fed's decision to cut interest rates by a quarter percentage point.
Because their exchange rates are pegged to the dollar in fixed trading ranges, monetary policy in the Persian Gulf states must mirror U.S. moves to avoid pressures from capital drifting to the currency with the most favorable interest rates.
The moves came despite concerns over rampant inflation in the region, which suggest central banks should be raising, instead of lowering, rates. Bankers said the policy conflict is building pressure on the Gulf states to unbind from the dollar.
In European emerging markets, meanwhile, the Central Bank of Iceland raised its key rate 0.45 percentage point to a record 13.75% in an effort to slow annual inflation, running at a 4.5% rate, down closer to its 2.5% target rate. It was the 19th time since 2004 that the Icelandic central bank has raised rates to keep its economy from overheating. The Romanian central bank Wednesday raised its key rate by one-half percentage point to 7.5%, fighting a 6% inflation rate the bank blamed on soaring household income and rising public spending.
In Asia, meanwhile, sharper-than-anticipated consumer-price inflation last month -- 3% above year-earlier levels -- prompted speculation the Bank of Korea will raise its policy rate, now at 5%, in the first quarter next year. The Hong Kong Monetary Authority, also struggling to balance domestic considerations with pressures from overseas investors, has been intervening to keep its currency from rising above publicly set bands.
Nowhere in the Middle East are the strains more acute than in the U.A.E., where investors are betting on a "depegging" of the dirham as domestic inflation pressures increase.
"Speculators are definitely bidding on a depegging, and that's why they're increasing their dirham deposits," Henry Azzam, Middle East chief executive at Deutsche Bank AG, told Zawya Dow Jones Newswires in an interview.
Attracting that money are chances of a quick profit once the peg snaps. Deposits held in the emirates' banks have exceeded one trillion dirhams ($272.3 billion) for the first time, more than is deposited in the region's largest economy, Saudi Arabia, latest central-bank figures show.
"The probability of depegging has increased," said Kamran Butt, Dubai-based chief economist at Credit Suisse Group. "The market consensus is for the U.A.E. to depeg." A decision by the U.A.E. to sever ties with the dollar could alienate the U.S. and add to the dollar's woes at a time of economic uncertainty and record oil prices.
The dollar, which fell to all-time lows against the euro and 26-year lows against sterling in the aftermath of Wednesday's rate cut, was at $1.4437 against the euro, from $1.4486 Wednesday. The U.K. pound was at $2.0787, from $2.0793 Wednesday.
The dollar's slump has pushed up the cost of imports to the Gulf, fueling inflation. The dollar's decline has watered down the benefit of record oil prices in the region that is expected to accrue a surplus in excess of $500 billion this year, according to Saudi lender Samba Financial Group.
Kuwait, the region's third-largest Arab oil producer, was the first to break ranks with its Gulf peers in May when it shunned its peg with the dollar by allowing the dinar to float against a basket of currencies and in a range against the dollar. It retains a loose dollar peg and joined other states in cutting rates yesterday.
The seven emirates are Abu Dhabi, 'Ajman, Al Fujayrah, Sharjah, Dubai, Ra's al Khaymah and Quwayn.
With inflation expected to exceed 10% for a second consecutive year in the U.A.E., the emirates' ruling sheiks face the region's greatest fiscal policy challenge since the U.K. devalued sterling in 1967, forcing Gulf states to turn to the dollar as a benchmark.
When the emirates created the dirham in 1973 they linked it effectively to the dollar. Now bankers such as Deutsche's Mr. Azzam are unsure whether the U.A.E. is ready for another such change. "I don't think a depeg will happen because that's a regional decision and it has served the U.A.E. so far," he said.
Source: Wall Street Journal
The myth of the Iranian oil weapon
Wednesday, October 31, 2007
by Bassam Fattou
Every now and then, an Iranian official makes a statement to the effect that the Islamic Republic would not rule out using the oil weapon if the UN imposes sanctions on Iran or if the United States decides to carry out military strikes against its nuclear sites.
In August 2006, Ali Larijani, the country's chief nuclear negotiator, announced that if the West imposes sanctions on Iran, then the Islamic Republic “will react in a way that would be painful for them (the West)”. He then warned that the West should “not force us (Iranians) to do something that will make people shiver in the cold…we (Iranians) do not want to use the oil weapon. It is them (the West) who would impose it upon us."
Last month, Iran's OPEC governor, Hossein Kazempour Ardebili, made a similar statement declaring that "when the Americans say that military action in regard to the nuclear issue has not been put aside, Iran can also say that it will not put aside oil as a tool".
Although Iran has many tools for deterrence or retaliation at its disposal, contrary to what many analysts believe, the oil weapon is not one of them. Many observers argue that importing countries’ double dependence on oil and stable oil prices implies that Iran possesses a very powerful weapon with which it can ‘blackmail’ oil-importing governments to obtain political concessions. This argument lacks an understanding of the nature of the oil market. In fact, the oil weapon can prove costly for the country using it and restricting oil exports would most often be ineffective and counterproductive in the longer term.
The Oil Weapon
To begin with, the oil weapon cannot be targeted against a specific country or group of countries. This is due to the nature of the market where oil is easily and widely traded. Countries that are not blacklisted can obtain oil and then redirect it to countries under the embargo. Adelman (2004) makes this point forcefully where he argues that “whether a supplier loves or hates a customer (or vice versa) does not matter because, in the world oil market, a seller cannot isolate any customer and a buyer cannot isolate any supplier. But conventional wisdom…. is that Middle Eastern nations wield an “oil weapon” that they can use to punish the United States or any other nation.”
For the oil embargo to be effective, it should result in the cutback of total global oil supplies. If the loss of oil due to Iran’s embargo is counteracted by increases in supplies from somewhere else, the embargo would still have impact on oil prices but the impact would be short-lived. In this case, the embargo would only benefit other producers that have spare capacity to fill the shortfall. Thus, the effectiveness of an oil weapon depends to a large extent on whether market conditions are tight and the ability of Iran to convince or pressure other producers to also implement supply reductions. Regarding the latter, it is very difficult to envisage a scenario in which other major Middle Eastern producers such as Saudi Arabia, UAE, or Kuwait would agree to implement cuts along with Iran. Disagreement on oil embargos and exports cuts is the norm rather than the exception.
In fact, it only occurred once, in 1973, when a large group of Arab producers decided to cut exports to countries “committing aggression or participating in aggression of sovereignty of any Arab state or its territories”. Given the uneasiness of Gulf States about Iran’s nuclear ambitions and the alliance in ‘need’ between US and GCC states, it is unlikely that any of the Arab oil exporters would participate in an oil embargo against the US.
Thus, any cuts would have to be implemented by Iran alone.
In fact, if anything, Saudi Arabia may attempt to fill any shortfall from Iran’s cutback to mitigate the long-term impact of supply cuts on oil markets. Voluntary restrictions that result in sharp increases in oil prices depress demand and push consuming nations to pursue oil substitution policies undermining oil exporters’ long term interests manifested in healthy growth of global oil demand. As Leonardo Maugeri argues, “an oil shock can be a terrible experience for the industrial countries, but is not a fatal blow. As soon as they perceive the long term nature of such a shock they react, and their reaction can turn into a permanent nightmare for any producers. Any structural reaction implies not only reduction in demand, but also much more money devoted to research and development of alternative sources of energy or investment in new oil producing countries”.
According to the latest International Energy Agency Monthly Oil Market Report, Saudi Arabia's spare capacity stood at 2.20 million barrels per day (b/d) which could cover all Iranian exports currently estimated at between 2 million and 2.5 million b/d.6
However, Saudi Arabia may not wish to be seen helping the US in attacking yet another Muslim country and may feel wary of the anger this may cause in some parts of the Muslim world and with its Shi’a population. Given these competing pressures, it is very difficult to predict whether Saudi Arabia would swing its production to meet any shortfall in Iran’s oil supplies. Most likely, Saudi Arabia would increase its oil exports but it would do it discretely so not to raise any opposition.
Like any oil exporter, Iran is highly dependent on oil revenues and hence cannot support production cutbacks for a sustained period. Oil accounts for 85 percent of Iran's exports and makes up 65 percent of government revenues which are used to pay for public-sector wages and to subsidize gasoline prices. That being said, a successful use of the oil weapon can raise prices to such levels that the loss due to the decline in production is compensated by the rise in total revenues. The ‘dependency on revenues’ argument for not using the oil weapon holds only if the country stops exporting oil altogether, which may be needed in the current case for the cutback to have a serious and sustained impact on oil markets.
Reducing exports by a couple of hundred thousand of barrels a day would easily be counteracted by OPEC’s spare capacity and OECD strategic reserves.
Assuming that Iran decides to implement large cuts and the loss of oil supplies is not counteracted by increases from other oil exporters, the use of oil weapon has an additional serious drawback. It is indiscriminate in the sense that it does not distinguish between a friend and a foe. Currently, Iran sells substantial amounts of crude oil to China and India and a shortfall in oil supplies would alienate these key Asian importers. Furthermore, a successful use of the oil weapon would lead to a sharp rise in oil prices which would have an adverse impact on all countries regardless whether of they are rich or poor, friend or foe. It is always possible to devise schemes to compensate friendly regimes, but these schemes are difficult to implement in practice.
The Closure of Oil Trade Routes
The use of the oil weapon can also take the form of closing oil trade routes. The bulk of oil is transported using a maritime tanker fleet. More than 1.9 billion tons of petroleum products a year are shipped by maritime transportation constituting around 62% of all petroleum products. The remainder is transported using pipelines (38%) or trains and trucks but usually over small distances.
International oil shipping lanes are forced to go through chokepoints. These are defined as locations “that limit the capacity of circulation and cannot be easily bypassed, if at all. This implies that any alternative to chokepoints involves a level of detour or use of an alternative that translated into significant financial costs and delays”. These chokepoints have certain physical characteristics such as width and depth of shipping lanes which make them vulnerable to blockades at least for a short period of time.
The Straits of Hormuz and Straits of Malacca constitute the world's most important oil chokepoint; close to 30 million b/d flow through these chokepoints. Oil tankers can avoid the Straits of Malacca but only at very high cost and longer journey times. It is virtually impossible nowadays to divert oil transit away from the Straits of Hormuz. The only significant outlet is the Saudi pipeline to Yanbu on the Red Sea, but this pipeline can only handle around 4.8 million b/d. Thus, the closure of the Straits of Hormuz represents the ultimate nightmare for the oil market as this chokepoint links the Persian Gulf oilfields to the rest of the world.
Many believe that the narrowness of shipping lanes and the difficulty of oil tankers to manoeuvre make the Straits of Hormuz vulnerable to politically motivated disruptions.
History however suggests otherwise. In 1983, the Iranians threatened to close the Straits of Hormuz following the delivery of French planes to Iraq. In a radio announcement, Hashimi Rafsanjani, then Speaker of Parliament, threatened that Iran would block the Straits of Hormuz by sinking a VLCC at the mouth of the Persian Gulf.9 There were 554 attacks on oil tankers in the Straits of Hormuz in what was known as the Iraq-Iran ‘Tanker War’ which resulted in the deaths of 400 sailors and 400 wounded. Yet these attacks never caused a full blockage of transit. Even when the fight was at its most intense point, it did not disrupt more than 2 percent of ships passing through the Persian Gulf.
In the current confrontations between the US and Iran on the latter’s nuclear program, threats to block the straits of Hormuz are being made again. In 2006, the Iranian deputy Basij commander, General Majid Mir Ahmadi, threatened to block oil traffic if the West hurt Iran's economy over its nuclear program. He declared that "given Iran's authority over the Strait of Hormuz that is the passage for more than 40 percent of the world's energy, we have become so strong that the economy and energy security of the world is in hands of Iran".
It is, however, very difficult to envisage a scenario in which the Straits of Hormuz would be blocked for a long period of time. To begin with, blocking the Straits of Hormuz would defy international conventions and would increase Iran’s isolation. The closure of this oil transit route would alienate Iran’s allies in Asia and elsewhere as the adverse impacts of the blockade would spread across the globe.
In other words, the use of this ‘weapon’ would be completely indiscriminate, and if Iran attempts to block international shipping, it will face a very wide and powerful coalition against it.
Blocking maritime activity also means that Iran would have to stop importing much needed petroleum products. Although it is one of the biggest crude oil producers in the world, Iran does not have enough refining capacity to convert crude oil into gasoline and hence the Islamic Republic has to import about 40 percent of its gasoline to satisfy domestic consumption costing the government around $5 billion a year.
Sustained shortages of gasoline and rationing may induce social unrest and may pose a serious threat to the Mullah regime. Recent events paint a picture of what the current regime could face in the case of a blockade. The government’s decision last month to ration monthly fuel allotments and increase gasoline prices at the pump triggered violent protest and riots in Iran’s major cities. It took the heavy hand of the security forces and the Basij militia to suppress the riots.
Furthermore, there are doubts about whether Iran can physically block the Straits of Hormuz. In this respect, there are four possible ways of blockage: by placing military artillery on one of the islands located near the shipping channels; by using mines; by sinking vessels in the shipping channel; and by imposing a naval blockade.14 Shazly (1998) and Blair and Lieberthal (2007) assess these possible ways and conclude that none of these is militarily feasible. Artilleries on islands can be destroyed by waves of air strikes. Given the Straits currents and depth, mines can be removed with little difficulty by minesweeping operations.
Furthermore, oil tankers are not as vulnerable as is commonly perceived. During the Iran-Iraq war many oil tankers went through mines without suffering any serious damage. Sinking modern oil tankers by mines and conventional warheads to block the Straits of Hormuz is very difficult and would require large missile stockpiles which a small naval power cannot maintain. As Blair and Lieberthal (2007:10) point out “in order to disable a modern-day tanker, an attack would have to include a salvo of eight to ten missiles with conventional warheads; a sustained campaign would quickly exhaust the missile stockpile of a medium-sized military power”. Iran could resort to non-traditional offensive operations such as the use of explosive-packed “super-modern flying boats” piloted by suicide bombers or suicide planes. Although such actions can adversely affect maritime activity, the damages caused would likely be limited, and could not be sustained for a long time and would not lead to a full blockade of the Straits.
Finally, Iran does not have a strong enough navy to enforce a blockade. The Iranian Navy would easily be defeated and neutralized by the strong US Fifth Fleet roaming the Persian Gulf.
Thus, only very extreme conditions would push Iran to use this ‘suicidal’ weapon and even then it may not succeed in achieving its objective of disrupting oil supplies. The above discussion does not to imply that US military attacks on Iran will not have any impact on oil markets. On the contrary, if the US decides to attack Iran’s nuclear sites, the flow of oil would be disrupted, as oil tankers would avoid passing through the Straits of Hormuz during the military strikes. Iran’s production would most likely halt.
This would likely cause panic in the oil market as countries would compete for oil access causing oil prices to overshoot to very high levels. The impact of this disruption by military action, which should not be confused with the use of the oil weapon, would be temporary and its effects could be mitigated by the use of OECD strategic and industrial reserves, which at the end of April stood at 1236 million barrels providing a forward cover of 54 days. The oil weapon may come into effect after attacks if Iran retaliated by cutting its oil exports. The impact of such a move would depend on the size of the cut and whether the shortfall is counteracted by the use of strategic reserves and/or Saudi Arabia’s spare capacity.
Iran’s strongest tools lie somewhere else
Thus, there are serious costs and risks associated with the use of the oil weapon. It is not always effective; it is indiscriminate; and it cannot be sustained for a long period of time. It is certainly not one of Iran’s strongest tools with which to confront the US.
The strongest tools that Iran possesses, but which it cannot publicise, consist of very capable clandestine networks throughout the region through which it can launch deadly attacks against US and British forces in Iraq, Afghanistan, and in the Gulf.
Furthermore, through its influence on client militia in Lebanon and Palestine and close alliance with Syria, Iran can also undermine stability in that part of the Middle East. Iran may respond to US attacks by inciting local rebellions among Shiite Muslim communities in the Gulf. Saudi Arabia whose Shiites population forms a local majority in the oil-rich Eastern Province could be one target. Another target could be the Island of Bahrain where the Shiites constitute the majority of the population.
Iran is already using some of these tactics in its fight against the US and would continue to use them with more severity if the US decides to attack Iran’s nuclear sites. Unlike the oil weapon, this strategy has many advantages: it can be targeted against US and British forces i.e. it is not indiscriminate; it is effective in discrediting US policy and can induce a certain momentum that may eventually force a full US military withdrawal from Iraq; and it can be sustained for a very long period of time.
However, in contrast to the oil weapon, Iran cannot publicly endorse the use of such tactics without losing international and regional support. Indeed, Iran’s official position has been to deny the use of such tactics. Just recently, the Iranian Supreme Leader Ayatullah Ali Khamenei refuted accusations that Iran is interfering in Iraq, Lebanon, Palestine and Afghanistan placing such accusations in the context of an attempt by Washington to hide and shift responsibility for its drastic failures in the region.15 It seems that Iran has created a novel approach in international relations: publicise its weakest weapon (oil) and keep silent and even deny its strongest and most effective tools. But in doing so, Iran has managed to highly politicize the issue of oil supplies at times when the oil market could benefit from some tranquillity.
Dr Bassam Fattouh is a Reader in Finance and Management in the Department of Financial and Management Studies, School of Oriental and African Studies, University of London and Senior Research Fellow at Oxford Institute for Energy Studies. The contents of this paper are the author’s sole responsibility. First published at Oxford Institute for Energy Studies.
Source: energypublisher
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