OPEC and the economic conquest of Iraq

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Mon, 24 Oct 2005 14:41:14 -0400

" Greg Palast " <palast

OPEC and the economic conquest of Iraq

 

 

 

 

 

OPEC AND THE ECONOMIC CONQUEST OF IRAQ

Why Iraq Still sells its oil à la cartel

Twilight of the neocon gods

 

Exclusive to Harper's Magazine

Monday, October 24, 2005

By Greg Palast

 

Note: This Saturday, October 22, Greg Palast and his co-author, the

Rev. Jesse Jackson, received a Project Censored award, the " alternative

Pulitzer Prize, " for their report, JIM CROW RETURNS TO THE VOTING BOOTH:

DOES AMERICA HAVE AN APARTHEID VOTE-COUNTING SYSTEM?

 

The Palast investigative team received a second award for uncovering

the State Department's confidential pre-war plans for the economic

conquest of Iraq.

 

By special arrangement with Harper's magazine, we are reproducing here

for the first time the entire updated article on the US government's

secret schemes for seizing control of the oil fields of Iraq....

 

 

TWO AND A HALF YEARS AND $202 BILLION into the war in Iraq, the United

States has at least one significant new asset to show for it:

effective membership, through our control of Iraq's energy policy, in

the Organization of the Petroleum Exporting Countries (OPEC), the

Arab-dominated oil cartel.

 

 

Just what to do with this proxy power has been, almost since President

Bush's first inaugural, the cause of a pitched battle between

neoconservatives at the Pentagon, on the one hand, and the State

Department and

the oil industry, on the other. At issue is whether Iraq will remain a

member in good standing of OPEC, upholding production limits and

thereby high prices, or a mutinous spoiler that could topple the Arab

oligopoly.

 

 

According to insiders and to documents obtained from the State

Department, the neocons, once in command, are now in full retreat. Iraq's

system of oil production, after a year of failed free-market

experimentation, is being re-created almost entirely on the lines

originally laid out

by Saddam Hussein.

 

 

Under the quiet direction of U.S. oil company executives working with

the State Department, the Iraqis have discarded the neocon vision of a

laissez faire, privatized oil operation in favor of one shackled to

quotas set by OPEC, which have been key to the 148% rise in oil prices

since the beginning of 2002. This rise is estimated to have cost the U.S.

economy 1.5% of its GDP, or a third of its total growth during the

period.

 

 

Given this economic blow, and given that OPEC states account for 46% of

America's oil imports, it may seem odd that the United States'

" remaking " of Iraq would allow for a national oil company that props

up OPEC's

price gouging. And in fact the original scheme for reconstruction, at

least the one favored by neoconservatives, was to privatize Iraq's oil

entirely and thereby undermine the oil cartel. One intellectual

godfather of this strategy was Ariel Cohen of the Heritage Foundation,

who in

September 2002 published (with Gerald P. O'Driscoll, Jr.) a

post-invasion plan, " The Road to Economic Prosperity for a Post-Saddam

Iraq, " that

put forward the idea of using Iraq to smash OPEC. Cohen explained to me

how such an extraordinary geopolitical feat might be accomplished. OPEC

maintains high oil prices by suppressing production through a quota

system effectively imposed on each member by Saudi Arabia, which

reigns by

dint of its overwhelming reserves. The Saudis, to maintain their

control on pricing, must keep a lid on production from other

members-particularly Iraq, which has the second greatest proven reserves.

 

 

Under Saddam Hussein, Iraq adhered to the OPEC quota limit

(historically set to equal Iran's, now 3.96 million barrels a day) via

state

ownership of all fields. Cohen reasoned that if Iraq's fields were

broken up

and sold off, a dozen competing operators would quickly crank up

production from their individual patches to the maximum possible, swiftly

raising Iraq's total output to 6 million barrels a day. This extra crude

would flood world petroleum markets, OPEC would devolve into mass

cheating and overproduction, oil prices would fall over a cliff, and

Saudi

Arabia-both economically and politically - would fall to its knees.

 

 

By February 2003, Cohen's position had been enshrined as official

policy, in the form of a hundred-page blueprint for the occupied nation

titled, " Moving the Iraqi Economy from Recovery to Sustainable Growth " -a

plan that generally embodied the principles for postwar Iraq favored by

Defense Secretary Donald Rumsfeld, Deputy Secretary Paul Wolfowitz, and

the Iran-Contra figure Elliott Abrams, now Deputy National Security

Adviser. Nominally written by a committee of Defense, State, and Treasury

officials, the blueprint was in fact the brainchild of a platoon of

corporate lobbyists, chief among them the flattax fanatic Grover

Norquist.

From overhauling tax rates to rewriting copyright law, the document

mapped out a radical makeover of Iraq as a free-market Xanadu-a sort of

Chile on the Tigris-including, on page 73, the sell-off of the nation's

crown jewels: " privatization... [of] the oil and supporting industries. "

 

 

Following the U.S. military's swift advance to Baghdad, those skeptical

of the neocon plan were summarily brushed aside. Chief among the

castoffs was General Jay Garner, the shortlived occupation viceroy who

on the

very night he arrived in Baghdad from Kuwait received a call from

Rumsfeld informing him of his dismissal. When I met with Garner last

March

at the Washington offices of L3 Corporation's giant security subsidiary

he now heads, the general told me that he had resisted imposing on

Iraqis the plan's sell-off of assets, especially the oil. " That's just

one

fight you don't have to take on right now, " he said. " You don't want to

end the day with more enemies than you started with. "

 

 

In plotting the destruction of OPEC, the neocons failed to predict the

virulent resistance of insurgent forces: the U.S. oil industry itself.

From the outset of the planning for war, U.S. oil executives had thrown

in their lot with the pragmatists at the State Department and the

National Security Council. Within weeks of the first inaugural, prominent

Iraqi expatriates-many with ties to U.S. industry-were invited to secret

discussions directed by Pamela Quanrud, an NSC economics expert now

employed at State. " It quickly became an oil group, " one participant,

Falah Aljibury, told me. Aljibury, an adviser to Amerada Hess's oil

trading

arm and to investment banking giant Goldman Sachs, who once served as a

back channel between the United States and Iraq during the Reagan and

George H. W. Bush administrations, cut ties to the Hussein regime

following the invasion of Kuwait.

 

 

The working group's ideas about the war had been far less starry-eyed

than those of the neocons. " The petroleum industry, the chemical

industry, the banking industry-they'd hoped that Iraq would go for a

revolution like in the past and government was shut down for two or

three days, "

Aljibury told me. " You have a martial law . . . and say Iraq is being

liberated and everybody stay where they are . . . Everything as is. " On

this plan, Hussein would simply have been replaced by some former

Baathist general. One candidate was General Nizar Khazraji, Saddam's

former

army chief of staff, who at the time was under house arrest in Denmark

pending charges for war crimes. (Khazraji was seen in Iraq a month

after the U.S. invasion, but he soon disappeared and has not been heard

from since.)

 

 

Roughly six months before the invasion, the Bush Administration

designated Philip Carroll to advise the Iraqi Oil Ministry once U.S.

tanks

entered Baghdad. Carroll had been CEO of both Fluor Corporation, now a

major contractor in Iraq, and, earlier, of Royal Dutch/Shell's U.S.

division. In May 2003, a month after his arrival in Iraq, Carroll made

headlines when he told the Washington Post that Iraq might break with

OPEC:

" [iraqis] have from time to time, because of compelling national

interest, elected to opt out of the quota system and pursue their own

path. .

.. . They may elect to do that same thing. To me, it's a very important

national question. " Carroll later told me, though, that he personally

would not have been supportive of privatizing oil fields. " Nobody in

their right mind would have thought of doing that, " he said.

 

 

Soon after Carroll resigned his post in September 2003, the new

provisional government appointed an oil minister, Ibrahim Bahr

al-Uloum. Uloum

(who had been maneuvered into the job by then-neocon favorite Ahmad

Chalabi) quickly fired Muhammad al-Jiburi, chief of Iraq's State Oil

Marketing Organization, and Thamer Ghadhban, the expert in charge of the

southern oil fields, both of whom had been trusted by the Western oil

industry. Production faltered from a combination of incompetence,

wholesale

theft (Iraq's oil was unmetered), sabotage, and corruption that one

oilman told me was " rampant, " with " direct payoffs to government

officials

by commercial operators. "

 

 

With pipelines exploding daily, the fantasy of remaking Iraq's oil

industry also went up in flames. Carroll was replaced by another Houston

oil chieftain, Rob McKee, a former executive vice-president of

ConocoPhillips and currently the chairman-even during his tenure in

Baghdad-of

Enventure, an oil-drilling supply subsidiary of the Halliburton

Corporation. McKee had little tolerance for the neocons' threat to

privatize the

oil fields. A close associate of McKee's and the executive adviser to

Hess's trading arm, Ed Morse, told me that " Rob was very promotive of

putting in place a really strong national oil company, " even if he had to

act over the objections of the Iraqi Governing Council. Morse, who says

he takes as many as six calls a day from the Bush Administration

regarding Iraq, is one of the men to whom Washington turns to obtain the

views of Big Oil. Like Carroll and McKee, Morse sneers at what he calls

" the obsession of neo-conservative writers on ways to undermine OPEC. "

Iraqis, says Morse, know that if they pump 6 million barrels a day, i.e.,

2 million above their expected OPEC quota, " they will crash the oil

market " and bring down their own economy.

 

 

In November 2003, McKee quietly ordered up a new plan for Iraq's oil.

The drafting would be overseen by a " senior adviser, " Amy Jaffe, who had

worked for Morse when he held the formidable title of Chairman of the

Council on Foreign Relations-James Baker III Institute Joint Committee

on Petroleum Security. Jaffe now works for Baker, the former Secretary

of State, whose law firm serves as counsel to both ExxonMobil and the

defense minister of Saudi Arabia. The plan, nominally written by State

Department contractor BearingPoint, was guided, says Jaffe, by a handful

of oil industry consultants and executives.

 

For months, the State Department officially denied the existence of

this 323-page plan for Iraq's oil, but when I identified the document's

title from my sources and threatened legal action, I was able to obtain

the complete report, dated December 2003 and entitled " Options for

Developing a Long Term Sustainable Iraqi Oil Industry. " The multi-volume

document describes seven possible models of oil production for Iraq, each

one merely a different flavor of a single option: the creation of a

state-owned oil company. The seven options ranged from the Saudi Aramco

model, in which the government owns the whole operation from reserves to

pipelines, to the Azerbaijan model, in which the state-owned assets are

operated almost entirely by " IOCs " (International Oil Companies). The

drafters had little regard for the " self-financing " system, such as

Saudi Arabia's, which bars IOCs from the fields; they prefer the

production-sharing agreement (PSA) model, under which the state maintains

official title to the reserves but operation and control are given to

foreign

oil companies. These companies then manage, fund, and equip crude

extraction in exchange for a percentage of sales receipts.

 

 

While promoting IOC control of the fields, the authors take care to

warn the Iraqi government against attempting to squeeze IOC profits:

" Countries that do not offer risk-adjusted rates of return equal to or

above

other nations will be unlikely to achieve significant levels of

investment, regardless of the richness of their geology. " Indeed, to

outbid

other nations for Big Oil's favor will require Iraq to turn over quite a

large share of profits, especially when competing against countries

such as Azerbaijan that have given away the store. The Azeri government,

notes the report, has " been able to partially overcome their risk

profile and attract billions of dollars of investment by offering a

contractual balance of commercial interests within the risk contract. "

This

refers to the fact that Azerbaijan, despite its poor oil quality and poor

location, drew in the IOCs via scandalous splits of revenue allowed by

the nation's corrupt government.

 

 

Given how easily the interests of OPEC and those of the IOCs can be

aligned, it is certainly understandable why smashing the oil cartel would

not strike oilmen as a good idea. In 2004, with oil approaching the

$50-a-barrel mark all year, the major U.S. oil companies posted record or

near record profits. ConocoPhillips, Rob McKee's company, this February

reported a doubling of its quarterly profits from the previous year,

which itself had been a company record; Carroll's former employer, Shell,

posted a record-breaking $4.48 billion in fourth-quarter earnings.

ExxonMobil last year reported the largest one-year operating profit of

any

corporation in U.S. history.

 

 

When I talked to Ariel Cohen at Heritage, his dream of smashing OPEC in

shambles, he blamed the State Department for acquiescing to the Saudis

and to Russia, which also benefit s from selling oil at high OPEC

prices. The poisonous policies were influenced, he said, by " Arab

economists

hired by the State Department who are basically supporting the witches'

brew of the Saudi royal family and the Soviet ostblock . . . because

the Saudis are interested in maximizing their market share and they're

not interested in fast growth of the Iraqi output. "

 

 

According to Morse, the switch to an OPEC-friendly policy for Iraq was

driven by Dick Cheney himself. " The person who is most influential in

running American energy policy is the Vice President, " who, says Morse,

" thinks that security begins by . . . letting prices follow wherever

they may. "

 

 

Even, I asked, if those are artificially high prices, set by OPEC? " The

VP's office [has] not pursued a policy in Iraq that would lead to a

rapid opening of the Iraqi energy sector . . . so they have not done

anything, either with producers or energy policy, that would put us on a

track to say, 'We're going to put a squeeze on OPEC.' "

 

 

Opposition to OPEC was handled in a style that would have made Saddam

proud. On May 20, 2004, Iraqi police raided Ahmad Chalabi's home in

Baghdad and carted away his computers and files. Chalabi was hunted by

his

own government: the charge was espionage, no less, for Iran. Chalabi's

Governing Council was soon shut down and, crucially, Bahr al-Uloum was

yanked from the Oil Ministry and replaced by the very men he had

removed: Thamer Ghadhban, who took al-Uloum's job at the oil ministry and

Chalabi rival Muhammad al-Jiburi who was made minister of trade.

 

 

But just when you thought the fat lady sang for the neo-cons, who

should rise from his crypt eight months later but Ahmad Chalabi. In

January

2005, Chalabi cut a deal with his former oil minister's father, a Shia

power broker, and rode that religious ethnic vote back into office.

Chalabi landed himself the post of Second Deputy Prime Minister and, in

addition, the tantalizing title of interim oil minister. The espionage

investigation was dropped; the King of Jordan offered to pardon Chalabi

for the $72 million missing from Chalabi's former bank; and Chalabi once

again turned over his oil ministry to Sheik al-Uloum's son. The Texans'

OPEC man Ghadhban, was again kicked downstairs.

 

 

But Chalabi had learned his lesson: don't mess with Texas, or the

Texan's favorite cartel. A chastened Chalabi now endorses Iraq's

cooperation

with OPEC's fleecing of the planet's oil consumers.

 

 

And Dick Cheney, far from " putting the squeeze on OPEC, " has taken his

de facto seat there, assenting by silence to the oil monopoly's

piratical price gouging. But hasn't OPEC's stratospheric crude prices

choked

the life out of America's auto industry and bankrupted half a dozen

airlines? In the Vice-President's bunker the elimination of jobs of

Democratic-leaning union members is likely seen as a bonus for the

good deed

of boosting oil industry profits far above the ozone layer.

 

 

**********

Greg Palast is the author of the New York Times bestseller, The Best

Democracy Money Can Buy. This is his fourth investigative report for

Harper's Magazine. Leni von Eckardt was chief researcher with Palast on

this project. This is the Palast team's fifth Project Censored award from

California State University's school of journalism.

 

The BBC Television Newsnight broadcast of this story was produced by

Meirion Jones. View the BBC report and sign up for Palast's investigation

updates at www.GregPalast.com

 

 

 

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