The decline in world oil prices, a threat to Iraq

The decline in world oil prices, a threat to Iraq

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Researcher Shatha Khalil *

Translated by : mudhaffar al-kusairi

Studies and specialized economic reports and many observers of the oil indicate, that Iraq is going through a critical phase in the event of falling oil prices.

Iraq loses more than one billion dollars annually in case of falling oil price of one dollar per barrel , and the low prices harm the Iraqi economy and exacerbate the problems of the state budget and its deficit in particular noting Iraq depends entirely on its oil revenues by 97%, as the Iraqi economy is a ( Rentier Economy ) , in which oil extraction and its revenues constitute a large part of the gross national product, and the annual budget depends on oil revenues to a large extent, and does not invest most of the oil revenues to produce human capital to compensate for the loss of natural capital, that is, the funds are not recycled which come from the sale of crude oil to produce increased value of domestic production in industry, agriculture and services, which means it is the biggest loser in the case of falling oil price.

State resource managers have not learned from the harsh past lessons of a 60% drop in oil prices. When they learn, benefit, invest and call for strategic planning of sustainable development.
Iraq’s budget for 2019:
The Iraqi government should reconsider the 2019 budget, and make the price of oil 50 dollars or even much lower after it was 56 dollars per barrel, and could fall further to 30 and even twenty dollars and less, which means that all the budget doors will fall, including operational , Investment or development in case oil prices continue to decline.
The government must change the barrel price estimates in the budget, develop alternative plans, and how new crises can be managed with new oil prices, where the budget law will be reflected on all parts of the state, and on the overall situation of life in Iraq.
In the context , the officials of the Iraqi state said that the 2019 budget proposed a deficit of up to 20 trillion dinars, which is a deficit budget , but the price of oil adopted in the budget is $ 56 a barrel, but what if the price of oil fell more a barrel?
In addition, the economist Osama al-Tamimi said that the price of a barrel of oil in the 2019 budget needs to be adjusted, as it should be calculated on the pricing of the 2018 budget and we wonder what if it fell more or much more , Iraq will go through a real disaster inevitably ?.
Al-Tamimi added that oil prices may fall below the $ 40 a barrel and that the 2019 budget needs to be adjusted by specialists in the financial, economic and oil fields, where the price of oil should drop to $ 45 or less, the same pricing of 2018 budget.
Iraq does not have a clear economic and oil vision to rely on in the preparation of budgets; it should not increase Iraq’s debt, especially with the decline in oil prices due to US policy.
Iraq does not have an economic vision to manage its wealth in the light of its problems and worsening crises, as Iraq is going through a serious phase of its contemporary history because of the wrong policies, the lack of clarity of vision and the absence of economic planning.
Since the US occupation in (2003) and so far has made the description of the Iraqi economy rentier economy by excellence, where the proportion of oil revenues in the annual budgets (97%), and the proportion of spending on salaries (operating expenses) up to (70%) of the budget, which means that When oil prices fell by 60% from previous years, the annual budget for 2015 lost by at least $ 60 billion, so the state budget is in trouble.
The lack of transparency in state institutions, financial and administrative corruption, the deterioration of the security situation since 2003, the events of ISIS, which occupied nearly a third of Iraq, as well as the issue of displaced persons, the destruction of infrastructure, the doubling of military spending, compensation for martyrs and stricken families, and sheltering of the displaced, all those factors combined have created multiple and overlapping crises.
Iraq was planned to produce 12 million barrels / day in 2017, then reduced the figure to 9.5 million barrels / day until 2030, as outlined in the proposed National Energy Strategy (INES) in 2013, and then reduced to (6) million barrels / day through the conclusion of service contracts with international oil companies that did not include clear contracts in details, and could have been included in the contracts as follows:
– The quality and specifications of the extracted oil.
– Taking care of the oil reservoir and the need to give periodic information on the status of the reservoir to the Iraqi side from time to time.
– How to market, transport and storage of oil after the extraction process in order to be a joint liability, where it could have been required for the contract to include a cooperation and take responsibility for marketing in conjunction with the Iraqi government, and the Iraqi side to make a contract with those consulting companies to prevent waste and exaggeration of expenses.
– Infrastructure, construction of service facilities such as roads, residential houses and markets could have been required from the contracting companies themselves
– Benefits and profits should be proportional to falling or rising prices.
– Determination of expenses by companies on the basis of known international standards and standards, and a third party to determine the correctness of lists of expenses submitted by companies for payment by the Iraqi government.

However, none of these projects has been realized as required, but the planned production in the 2015 budget of 3.3 million barrels / day, only by 3 million barrels / day was achieved . it was noted that the damage resulted from the delay in implementation of the plan to increase production , despite the cooperation with international oil companies, it has inflicted heavy losses on Iraq, which for five years has missed a golden opportunity to benefit from high oil prices.

One of the reasons that delayed the increase in production was the decision to withdraw the oil field injection project with water to maintain the balance of pressure in the oil reservoirs from Exxon company and assigned it to the State Oil Projects Company, which was not qualified to undertake this huge project which caused to the delay the project by more than three years, and damaging the southern oil reservoirs that it may be difficult to compensate, in addition to the lack of completion of oil reservoirs projects and export outlets to be able to absorb the increase in production, it must be noted that it has recently completed a section of the reservoirs, but not enough , and delays in a project Collecting Associated gas and stop combustion, and immediate work to process and collect it from all fields of the South, and the exploitation of the production of electric power and local industries or export it to neighboring countries led to the increase of financial losses by between (15-30) million dollars / day, which is equivalent to (10) billion dollars annually, in addition to depriving the people and the Iraqi economy of electricity, in addition to the environmental pollution in the excretion of heat and carbon dioxide into the atmosphere, which posed an environmental threat to Iraq and the world.

The delay in the construction of crude oil tanks at the main export complexes, and the suspension of loading for a period of ten days to two weeks, cause a loss in export by about (20) million dollars per day.

Most importantly, losses resulting from compensation to companies contracted in service contracts when they fulfill their obligations in oil production required by contract, and delays caused by the inability of the Iraqi government to absorb its production or storage, to ensure the sustainability of work, as well as the double expenses that these companies bring to the Iraqi government for payment.

Oil in the Kurdistan Region:
As for the northern oil and the Kurdistan region, there has been a deep disagreement between the governments of the Center and the region, because of a misinterpretation in the articles of the Iraqi constitution, and despite an initial agreement between the current oil minister and the regional government commits the latter to abide by exporting (300) thousand barrels / day from Kirkuk fields by passing through the territory of the region , and (250) thousand barrels / day from the fields of the region to the company (Somo) which is responsible for the export of Iraqi oil, but the region did not strictly adhere to this agreement, and there are doubts that the region to export more quantities through Turkey, and the availability of huge oil reserves in the region by 24 billion barrels in addition to Kirkuk increased the doubts , according to the estimates of the Ministry of Oil of Kurdistan) where most of them were developed and explored after (2003) and the interest of discreet international companies to invest in the region, especially in light of the agreements of participation, rather than service contracts, which are desired by companies because they get a percentage of the discovered reserves , It can registers it in its assets, which helps in raising the value of its shares on the international stock exchanges.

Iraq currently has a population of 36 million, whereas before 2003, the population was only 22 million, meaning that the annual growth rate was 3%, this weakens the government’s ability in its current situation to provide the construction needs of Iraq , as nearly 800,000 young people become eligible to work annually , and the state must create at least 250,000 job opportunities for the unemployed so that the percentage of them become acceptable. These figures can be feasible in advanced industrialized countries. However, the current circumstances of Iraq, and any political force of the country can not create such figures of jobs annually.

The successive governments that came after (2003) started to inflate the government system from (1,050.000) employees before (2003) to the (4.5) million employees currently except (1.732) million retirees and more than 0.5 million of social welfare noting that the increase of salaries of employees have strained the state budget despite the huge increase in oil prices in previous years, and put the government in a very critical position when the prices of oil are declined , that the crisis of increasing graduates ca not solved by the method of job slouch , increase salaries, and does not reduce the migration of young people . Therefore, the experience was essentially a failure, and there was a slouch in the government apparatus and inflated salaries without an increase in the performance and productivity, but rather the contrary, an increase in routine.

Many countries in the world have gone beyond the manifestations of the rentier state in over-reliance on natural resources of various kinds, including Botswana, Chile, Malaysia, Indonesia and others, with sound planning towards sustainable development, and the experiences of the countries that preceded us in this regard can be used and applied in accordance with our objective conditions.
Iraq’s industrial and agricultural development, whether in private or public activity, has not risen to the level of sustainable development, in order to rise, progress and sustain an increasing pace of economic growth by achieving a decent percentage of GDP and added value, and improving the standard of living of the community at large.
The reason is not, as some believe, due to the political circumstances and internal and external wars that have taken place in Iraq since the founding of the modern state in 1921 and till now but there was a defect in planning and mismanagement, and the lack of awareness of the fundamentals and the necessities of sustainable development.

The mere process of transferring technology by bringing machinery and equipment with surplus capital from oil revenues, and relying on foreign companies for everything is not enough on its own, but must acquire knowledge, expertise, and correct guidance, and restructuring education, in order to create a generation capable of accommodating the variables of the times and to proceed a head with innovation and development, increasing production and imposing its products independently of government support in the long run.

The process of sustainable development in a country such as Iraq possesses proven oil reserves of (150) billion barrels / calculated on April 10, 2013 (according to the Iraqi Ministry of Oil), and reserves of natural gas (3.2) trillion cubic meters, must take the right scientific steps for development and investment.

We conclude from the above that Iraq and some countries in the region have reached a very difficult stage in the policy of rentier economy, and excessive dependence on oil revenues in everything, and that falling prices are a sound of alarm , a threat to the lives of Iraqis, and therefore calls for an economic strategy that adopts the process of sustainable development noting that Iraq has all the necessary ingredients for transformation and advancement, through the availability of human resources and expertise and oil and gas reserves, it must adopt a new strategy for education and human development capable of advancement and progress, and work to rebuild the political process and legislation of necessary laws to encourage investment in the public and private sectors and the advancement of the country again.

Economic Studies Unit
Rawabet Center for Research and Strategic Studies