Why Iraq oil money hasn't fueled rebuilding

Qureshi says the early rosy predictions of Iraq's ability to rebuild itself were "always off base," but he adds that the country should be able to take on more of the burden - if it weren't losing potential revenues.

He estimates that perhaps 5 percent of oil revenues are being lost to theft and product smuggling, although estimates from other experts range much higher.

Recently, for example, hundreds of millions of dollars in oil revenues were found after they were "misplaced" in unauthorized Iraqi and Jordanian bank accounts, according to some press reports.

The artificially low prices that the government keeps on gasoline and other products inside the country are one reason for the rampant smuggling of such products. Entire smuggling rings have developed around delivering subsidized products to neighboring countries where prices are higher. At the same time, many Iraqis are willing to pay a premium for black-market gas to avoid long and sometimes dangerous lines at gas stations.

Mr. Luft of Global Security says it shouldn't surprise anyone that such corruption and profiteering are flourishing in a traditional tribal society - especially one recently released from the ties of a dictatorial regime. "Corruption will always be part of tribal societies," he says. "There is no allegiance to the state."

Luft also says that his institute's tracking of attacks on oil infrastructure shows a shift in targets - from export-oriented installations like pipelines to power plants and other facilities for domestic energy production. The aim: to dim any public confidence in the government's ability to meet its needs.

But experts emphasize that some of the oil sector's problems have nothing to do with insurgents. The state is placing revenue production over maintenance and modernization, they say, risking long-term damage to oil fields. For example, water-injection systems that extend a well's production life are not being kept up in the major southern oil field. Even the State Department has recently red-flagged this and similar problems in Iraq's oil sector.

The failings of Iraq's oil sector are of international concern, experts note, in part because lost production there contributes to a higher price tag on a barrel of oil. "Iraq is a big enough player in the international market that better performance there would have had an impact on price increases," says Qureshi of PFC Energy.

Driving oil prices higher is apparently another objective of Iraq's insurgents. "I've seen it on websites affiliated with the insurgency - the praising of attacks on facilities as a way to drive oil prices up and thus hurt the US and Western economies," says Luft. "Coupled with the goal of raising the Iraqi public's frustrations, they see these attacks as a way to kill two birds with one stone."

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