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Bad Forecasts Cause Sticky Oil Situation

September 21, 2003|Michelle Billig | Michelle Billig was in the U.S. Department of Energy under the Clinton and Bush administrations and is currently a fellow with the Council on Foreign Relations.

NEW YORK — Oil and gasoline are not much cheaper today than they were during the height of the war in Iraq. Sabotage of pipelines, power failures and uneven security have delayed the restarting of Iraq's oil industry, depressing the country's oil exports below prewar levels. In particular, the loss of the northern pipeline to Turkey last month has kept nearly 1 million barrels of oil per day off world markets. If the problems are not corrected, oil supplies will remain tight, gasoline prices will stay high or climb, and the U.S. economic recovery could stall.

Why has the situation deteriorated to this point? Wasn't securing and protecting Iraq's oil fields a prime military objective? Wasn't modernizing the country's production facilities part of postwar reconstruction planning?

U.S. and British soldiers were successful in keeping Iraq's oil industry from becoming an infrastructure casualty of war. The Defense Department expected oil to flow within weeks of victory. Then, the sabotage and violence began, and postwar planners have been playing catch-up ever since. It's increasingly evident that they didn't expect strategic and sequential attacks on pipelines and pylons.

In some ways, U.S. and coalition authorities were justified in downplaying the possible effect of Iraqi resistance on oil exports. When Saddam Hussein previously cut Iraq's oil exports, prices didn't skyrocket. In part, this was because other oil-producing countries were willing and able to pick up the production slack.

That situation has changed. World oil supplies are now extremely tight. They have never fully recovered from a December 2002 general strike in Venezuela, which resulted in the loss of more than 3 million barrels a day of production. Civil unrest in Nigeria compounded shortages on the eve of the U.S.-led invasion of Iraq.

Since then, the coalition's management of Iraq's oil industry has worsened the problem. Initial postwar statements from the Defense Department fed false expectations that Iraq's oil production and exports would be quickly restored. The Organization of Petroleum Exporting Countries, which produces about one-third of the world's oil, took the optimistic statements at face value and cut production immediately after the war to avoid an oil glut and falling prices.

As a result, commercial oil inventories in the United States and Europe reached their lowest seasonal level in years. The supply crunch has left energy prices more vulnerable to continued disruptions in Iraq and elsewhere.

Mixed messages from Iraq continue to confuse the oil market and impede additional production. Before the war, the U.N. "oil for food" program kept track of Iraq's oil exports and released regular reports. Today, there is no single official source for information on Iraq's oil industry. Press reports cite ambiguous and, at times, conflicting statements from the Coalition Provisional Authority; the Army Corps of Engineers, which has little understanding of oil-market dynamics; and the Iraqi oil ministry. Furthermore, U.S. and British officials desperate to demonstrate concrete progress with the reconstruction effort have a strong incentive to overstate actual production in order to tout the recovery plan for Iraqi and American audiences.

Damage assessments and repair schedules vary from spokesman to spokesman. For example, Iraq's then-acting oil minister said last month that repairs on the sabotaged northern pipeline would take up to a week. At the same time, Col. Guy Shields, a military spokesman, estimated the repairs at 10 days to two weeks. Then, earlier this month, with the pipeline still closed, Col. Robert Nicholson of the 4th Infantry Division said repairs would take five weeks more.

Faced with this uncertainty, OPEC is reluctant to act. Why risk oversupplying the market and pushing down prices if Iraqi oil production comes back sooner than expected? The organization is scheduled to meet Wednesday to consider lowering production quotas to avoid a price collapse if (and when) more oil from Iraq and non-OPEC countries, including Russia, hits the market early next year.

U.S. officials in Washington privately acknowledge the negative effect that Iraq has had on the world's oil market and point to the pressing need for more accurate and reliable information. Better forecasts of Iraqi oil exports over the next six months would help OPEC and other producers determine how much extra oil is needed to meet world demand.

The recent appointment of Iraq's first postwar oil minister provides an opportunity to send the right signals to oil producers. A spokesperson to deliver regular status reports on the country's energy supply should also be designated. The reports should include current production levels, export numbers and updates on infrastructure repairs. If need be, they could be made available through the U.S. Energy Information Administration, which typically provides this kind of information during a supply disruption.

Obviously, Iraq's oil industry requires a lot more than better and more reliable information. But the U.S.-led coalition should help untangle the global oil market from Iraq by ensuring that information coming out of it will not act to create havoc in energy markets.

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