Oil focus already begins to shift past securing of wells

Allied control of key southern fields bodes well long-term for Iraq and consumers.

On the oil front, the US and its allies are making solid gains.

The nightmare of hundreds of sabotaged Iraqi oil wells, burning for weeks and devastating both the country's economic treasure and its environment, has so far been avoided.

Allied forces have been quick to secure many key oil fields, and while questions still remain about northern fields around the city of Kirkuk, they appear to be undamaged. That's good news for Iraq's economic future and for global oil consumers - including American drivers.

A dip in oil prices that began last week is expected to continue as the news sinks in - with industry analysts predicting price drops at US gas pumps.

"Gas prices should begin to fall within a couple of weeks, unless the war is looking like it would be prolonged," says Arvind Panagariya, an international economist at the University of Maryland.

Any initial drop in prices would reflect "the speculative impact" of early dire predictions about the fate of Iraq's oil industry not coming true, Professor Panagariya says. But a sustained impact on prices at the pump will "depend on how other big producers ultimately react."

Anticipating a shortfall in production by Iraq, Saudi Arabia and other OPEC countries had been overproducing oil in the weeks prior to the war.

The swiftness with which the oil fields were seized by American and British troops is also keeping alive the suspicions of many that this war is about oil interests - as placards at weekend war-protest rallies around the world attest. Demonstrators in Berlin, for example, carried an effigy of the Statue of Liberty - with an oil drum in her arms.

The US maintains that Iraq's oil wells, which prior to the war had produced 2.5 million barrels a day, will be essential to rebuilding the country and its economy. Even so, questions still abound about how Iraq's vast oil wealth - second only the Saudi Arabia's in terms of reserves - will be administered in the postwar period.

Among the questions:

• Who will benefit from reconstruction and modernization of Iraq's oil industry?

• Can the US persuade the doubters that it is not out to dominate Iraq's oil wealth?

• And can those assets really be counted on to pay for much of Iraq's reconstruction and postwar administration?

The US is already raising eyebrows by initially calling on a Houston firm with ties to Vice-President Dick Cheney to oversee putting out any oil fires and begin putting the country's neglected oil production infrastructure back in shape. Kellogg, Brown & Root International is a subsidiary of the Houston-based Halliburton Co., where Mr. Cheney served as chairman until he was tapped to join the Republican 2000 presidential ticket.

But Iraq will require several years and at least $5 billion in investment to put its industry in shape to return to its pre-Gulf War production levels, oil experts say. It is one reason that analysts like Michael O'Hanlon of the Brookings Institution, a Washington think tank, say it would be foolish to assume Iraq will be in a position to quickly pay for its own postwar reconstruction.

"Even if Iraq's oil fields aren't damaged any further [in this war], you're going to see a need to spend a good deal of money to fix the infrastructure," says Farouk El-Baz, an energy expert at Boston University.

Before the Gulf War, Iraq was producing as much as 3.5 million barrels of oil a day, but that fell to something closer to 2 million barrels in the years following the war - a level that has risen slightly to as much as 2.5 million barrels a day more recently. Experts say modernization could return Iraq to pre-Gulf-War production levels within a few years - and much higher by the end of the decade.

But before then, other fingers will be dipping into the pot of Iraq's oil income. Initially, oil profits are likely to continue flowing into the United Nations' oil-for-food program, which was jointly administered by the UN and Iraq. The program was designed to ensure that Iraq's oil wealth benefited the Iraqi people and was not spent on rearming the country. Nearly two-thirds of Iraqis are dependent on the UN program.

Last week UN Secretary-General Kofi Annan, backed by the US and Britain, asked the Security Council to assign him the task of overseeing the oil-for-food program. Because it is backed by the US and Britain, that proposal is receiving a cold shoulder from some Council members opposed to the war. That kind of reaction is an example of what the US can expect as it goes about plans to rebuild Iraq's oil industry - and the country in general.

"I foresee the administration being very sensitive to perceptions of how it is handling the oil issue," says Professor El-Baz. "What we're seeing indicates the UN will be brought back into this, as one way of making the point very clearly that this was not a war about oil."

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