Iraqi oil production and the US strategic reserves

[Colin Rowat <cir20@DELETETHIScus.cam.ac.uk>]

List members,

I have recently received an e-mail containing what I felt to be a very
topical question:

        It would seem that the US should have Iraq sell their oil rather
        than deplete the reserves of the US.  Is this the case?

I am therefore attaching my answer below in the event that it might be of
some interest. 

Best,

Colin Rowat

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                                -----

Yes, I think that a case can be made that, were Iraq's oil industry in
better shape, global supply would be more able to increase than it is now. 
This, in turn, would allow world oil prices to come down. 

This belief has also been expressed recently by Benon Sevan, the man in
charge of the UN's Iraq operations in New York.  See his remarks of 21
September at

        http://www.un.org/Depts/oip/reports/benon21.html

in which he says

        On the one hand, everyone is calling on OPEC to increase the
        export of oil.  On the other hand, the spare parts and equipment
        that are the minimum requirements of Iraq’s oil industry, have
        been facing serious obstacles in the Security Council Committee. 

While I think that the above is true, there are at least two more twists
that I wanted to clarify.

First, Iraq is currently allowed to sell as much oil as it can pump.
As Iraq seems currently to be pumping all that it can, this means that the
problem of bringing extra Iraqi oil onto the market may not be a
short-term one: it's not a matter of simply giving permission for more to
be pumped: a decade of neglect of Iraq's oil industry must be overcome.

To sum up: greater commitment by the UN to allowing Iraq to rebuild its
oil industry might drop prices indirectly, by causing the market to look
forward to a day when more Iraqi oil will be available, but it probably
will not do so directly, by bringing more Iraqi oil on immediately. 

Actually: let me qualify this a bit more.  The Iraqi Ministry of Oil seems
to make its pumping plans with an idea of what oil spare parts it expects
to receive.  See, for example, the UN Secretary-General's 10 March 2000
report at

        http://www.un.org/Depts/oip/reports/s-2000-208.htm

which states, in §§25 - 27, that:

        In order to maximize revenue, and in expectation of the arrival of
        spare parts and equipment in 1998 and thereafter, the production
        of crude oil was incrementally increased by the Government of Iraq
        to a level of 3 million barrels per day by November 1999, without
        the technical resources to apply "good oilfield practice"...  In
        order to maximize revenue, and in expectation of the arrival of
        spare parts and equipment in 1998 and thereafter, the production
        of crude oil was incrementally increased by the Government of Iraq
        to a level of 3 million barrels per day by November 1999, without
        the technical resources to apply "good oilfield practice".
        In order to maximize revenue, and in expectation of the arrival of
        spare parts and equipment in 1998 and thereafter, the production
        of crude oil was incrementally increased by the Government of Iraq
        to a level of 3 million barrels per day by November 1999, without
        the technical resources to apply "good oilfield practice". 

Hence the qualification: if Iraq's oil ministry knew that it could count on
rebuilding in the near future, it might push current production higher.

Now on to the final twist, that of whether the US should use its strategic
reserves.  Certainly this is politically motivated: it seems to me that
it's very unusual for a vice-president to be making suggestions to his
President in public.  It is also, I think, not consistent with the
original intent of the strategic reserves.  On both of these counts, I
agree with George W. Bush.

That said, it is not clear to me that the appropriate use of the strategic
reserves should not be expanded.  The problem seems to be similar to that
which a central bank faces: both have certain reserves (dollars or oil)
that they can increase or decrease to manipulate the price of dollars or
oil.  But if this is the argument for intervention, then one should apply
the same rigour to decisions about how the strategic reserve should be
allowed to intervene in the oil market that one applies to how the Federal
Reserve should intervene in its own market.  Currently, there are no signs
of such rigour, leading me to believe that there is a risk that this is
not an appropriate use of the reserves.

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