Six key questions for the future of Iraq - and its oil

In a week, the new Iraqi government takes charge of the world's second largest pool of oil. That's important not only to the Iraqis, but to motorists and other oil consumers around the world.

It is sometimes alleged that the real reason the United States invaded Iraq was to control that nation's petroleum. But if that was a hope of some neo- conservatives and US oil industry executives, the war has so far failed to achieve that objective.

Indeed, Iraq's new oil minister, Samir Ghadban, talks of taking back full sovereignty over the oil wealth July 1, of reestablishing the Iraqi National Oil Co.'s vital role in production as it used to be before Saddam Hussein, and of dismissing all US and other outside advisers, according to an interview in the London-based Financial Times.

Such words don't seem to disturb Washington. Officials there speak of "a lot of respect" for Mr. Ghadban, a British-educated technocrat who is a Shiite, and they call him "a man who knows how to get things done."

Ghadban has been talking for months to many people about how to manage his nation's oil resources, and of making some structural reforms to improve the oil industry's efficiency.

Despite a new round of sabotage, Ghadban figures that oil will still produce $16 billion in revenues this year. Today's high price of oil has meant the Coalition Provisional Authority, the US-led occupation body, has had an extra $2.5 billion on top of its original budget to spend on security and development.

Up to now, the Iraqis have striven to bring their oil industry back to its pre-war production levels. Now the oil ministry faces major questions about the long-term future of Iraq's oil industry. The actual decisions are expected to await the government to be elected seven months from now. Here are the big questions.

1. Will the oil ministry invite foreign oil companies, with their capital and technical expertise, to search for and develop new oil fields and build infrastructure, thereby opening the door for US firms? Or will it leave that work to the Iraqi National Oil Co. with its skilled workers? Or will it be a mixture of both?

2. How will the oil revenues be used? At the moment, Iraq's oil revenues go into a development fund created under a United Nations resolution. Next week the Iraqis, not the occupation regime, decide how to use that fund to pay for repairs of power grids, schools, and other needs.

3. How much of the oil revenues will be used to pay off Iraq's massive debts? Already, 5 percent of that development fund is allotted to pay reparations for damage and casualties from Iraq's 1990 invasion of Kuwait. Some $48 billion in claims have been accepted, and $18 billion paid on them. Another $80 billion in claims have yet to be adjudicated by a UN compensation commission.

When that's finished, perhaps by the end of this year, Iraq will owe about $46 billion in compensation, calculates Bathsheba Crocker, an expert at the Center for International and Strategic Studies in Washington.

Iraq owes another $120 billion to foreign governments and other foreign entities. The US has been striving to negotiate a dramatic reduction in that amount, perhaps by two-thirds. But at the G-8 summit earlier this month, France refused to go below a 50 percent cut. When the debt talks are over, Iraq may still owe more than $40 billion on these debts.

Full repayment of the debts, even with Iraq's huge oil wealth, is most unlikely.

4. How will the Kurds' desire for control of the northern oil fields be worked out? At the moment, the plan is for the Baghdad government to centralize the oil revenues and then distribute the benefits to the entire country, including the Kurdish areas in the north. The Kurds get some oil money directly now.

5. Will Iraq make all oil payments public and transparent in order to discourage corruption? That is being urged on all oil-producing nations by the Open Society Institute in New York, a George Soros group.

6. What model will Iraq take for its oil industry? That of Saudi Arabia, Norway, Venezuela, or even Alaska? Alaska distributes some of its oil profits to its citizens. Nancy Birdsall, president of the Center for Global Development, would like Iraq to do something similar as a means of avoiding what is commonly called the "resource curse."

For most developing countries, "oil riches are far from the blessing they are often assumed to be," write Ms. Birdsall and Arvind Subramanian, an International Monetary Fund official, in a forthcoming Foreign Affairs article. "In fact, countries often end up poor precisely because they are oil rich."

Oil wealth, they note, tends to impede the development of institutions and values crucial to open, market-based economies and civil liberties, including the rule of law, protection of property rights, and political participation.

The 34 oil-rich developing countries have weak political and economic institutions. In some cases, such as the Democratic Republic of the Congo and Angola, they're nonexistent. Even Libya and especially rich Saudi Arabia suffer from "underdeveloped political institutions."

Oil riches often have led to high-level corruption and unchecked abuse of state power. With oil prices usually volatile, a nation relying on oil wealth sometimes faces a pattern of flush spending and then disruptive spending cuts that hurt development efforts.

Major oil revenues can also force up the value of a nation's currency on foreign-exchange markets, making it difficult for other industries to compete.

To avoid the oil curse, Birdsall and Mr. Subramanian suggest Iraq should incorporate into its constitution a provision enshrining the right of each Iraqi household to receive a share of the country's oil proceeds.

The chances of that happening appear slim. But one way or another, Washington officials say, Iraq's oil wealth must be used to serve the Iraqi people.

"Oil doesn't correlate with national success that often," a Washington official admits. In one week's time, it will be up to Iraqis to figure out how to avoid the resource curse.

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