The beginnings of the Iraqi oil industry go back to the period of Ottoman rule over the
state of Iraq. The first company that sought to profit from Iraq’s vast quantities of oil reserves
and was granted concessions for exploration and production was the Turkish Petroleum
Company, or the IPC (later renamed the Iraq Petroleum Company). Later, two companies that
were given oil concessions by the Iraq government for a period of seventy five years were the
Basra Petroleum Company (BPC) and the Mosul Petroleum Company (MPC). These two
companies were owned by British Petroleum (BP), Shell Petroleum (Shell), French Petroleum
Company (CFP) and the Near Eastern Development Corporation (formerly Exxon and Mobil).
Thus, while petroleum could have provided a means for economic stimulation for the Iraqi
economy, the valuable natural resource was instead controlled by foreign imperial powers and
multinational corporations.
The 1938 Agreement had marked the beginning of the decline of an international
holding in the stakes of the Iraqi oil industry as well as the Iraqi control over its own oil
reserves. The agreement was essentially the result of a series of negotiations between
multinational oil companies as well and the Iraqi government over royalties. The achievements
included an establishment of a formal definition of oil profit as well as the dedication of fifty
percent of the profit to the Iraqi government. Thus, the Iraqi government had benefitted from
the increased profits from the negotiations. However, the distinction between the profits
attributed to the 1938 agreement and the increase in world oil prices due to an increase
demand is unclear.
The final political act that sealed Iraqi control over its oil industry and resulted in
profound economic effects is the nationalization of the oil industry in 1966. The establishment
of the Iraqi national Oil Company had effectively allowed Iraq to break away from the influence
of foreign multinational corporations as well create an industry that would create local jobs,
and an investment fund for the state. On the other hand, the maneuver had created conflict
with neighboring states in the Middle East, particularly those that were part of OPEC. Iraq
became increasingly disinterested with Organization of Petroleum Exporting Countries (OPEC)
for the sake of independent national interests especially when the organization sought to allow
member states to purchase equity interests in companies such as the Iraqi Public Company
(IPC). As a result this independence as well as the increasing demand for oil combined with
market panic, Iraq had managed to reap enormous oil revenue during the OPEC oil embargo.
Furthermore, oil profits were sustained by anchoring prices slightly below those of OPEC’s
which created a high degree of dependence on oil revenues.
While external factors such world demand for oil determined oil revenues, internal
political factors were just as pivotal in determining the growth and sustainability of the
industry. As the industry rapidly development, the state was increasingly relied on oil revenues
and was putting pressure on the government to sustain and expand the industry. Inter-regional
and international political or religious conflicts and civil unrest can both negatively impact
growth. With oil revenue contributing up to ninety nine percent of Iraq’s gross domestic
product, oil dependency rendered a high fragile possibly unstable economy that is susceptible
to endogenous shocks. Thus, economic stability became highly linked to political stability. An
example illustrating this point is the Iraqi invasion of Kuwait which led to an international
backlash in the form of economic sanctions.
A discussion of the prospects of the Iraqi petro-economy that holds no regards to the
United States foreign policy objectives preceding the invasion in 2003 is a highly one-
dimensional approach especially when taking into consideration the fundamental political shift
which resulted from the obliteration of Saddam Hussein Sunni Baathist regime. The American
political model is based on the presumption that a thoroughly democratic Iraqi state will lead to
national stability. The model is based on the presumption that the instability and continuation
of violent conflicts is a consequence of the authoritarian nature of the regime which enabled
continuous repression and escalation of ethnic conflict. The dichotomies between Arabs and
Kurds and Sunni and Shi’ite Muslims are the framework that guides foreign policy. However,
within this framework lie crucial fallacies. While ethnosecterianism plays important roles in
shaping politics, other concepts such as political ideology and nationalism often transcend
ethnosectarian divisions. The American political model does not only imply the establishment
of a democratic state of Iraq but the decentralization of power from the capital of Baghdad to
the provinces.
The most significant ethnosectarian divide concerning control of the oil industry in Iraq
is between the Kurds and the Arabs. Oil revenue plays a highly significant role in the Iraqi
economy and access to oil implies access to wealth and power. Some areas of contention
include not only sharing of revenue but management of resources, distribution of licenses and
industry development. The ethnosectarian divide is largely based on the geographic distribution
of the resource as well as the distribution of ethnic groups across the state. The largest oil
producing regions are in the northern regions of Iraq, concentrated around the resource rich
city of Kirkuk, an area that Kurdish nationalists seek to control. Members of the Shi’i community
particularly supporters of al-Maliki’s Dawa party and supporters of Muqtada al Sadr seek to
establish a strong central government centered around the capital of Baghdad in order to retain
control of the oil industry. The Kurdish Regional Government (KRG) is highly suspicious of Maliki
and believe that the objective of the Dawa party is to consolidate the industry and reap profit
at the expensive of Kurdish resources. In particular, the KRG is fearful of any form of
centralization especially after the political violence inflicted by the regime under Sadam. In
addition, control over oil reserves and production is a step toward full fledged Kurdish
autonomy, an objective that is rejected by the Shi’i in Baghdad for obvious economic reasons.
Kurdistan is a province that holds significant geostrategic importance since it borders Turkey
and contains a pipeline that channels oil away from the Middle East.
Estimations regarding the quantity of oil is contained in Iraq is uncertain due to decades
of war and lack of scientific research, however, the estimated reserves in the region rank 143
billions of barrels per day. A significant increase in industry investment as well as geographic
exploration is needed to fully exploit the reserves. The United States Energy Information
Administration estimates that ninety percent of the territory in Iraq remains unexplored. In
addition, oil production costs in Iraq are one of the lowest in the world. Thus, there is reason to
believe that the reserves will contribute significantly to the economy but only if Iraq can
succeed in maintaining a unified state. However there are factors that are negatively
contributing to the industry. While oil production in Iraq has faltered due to trade embargos
due to the invasion of Kuwait in 1990, the oil industry is actually unsustainable. Iraq is
producing 3.5 million barrels of oil per day while the sustainable production capacity is only 2.8-
2.9 billions of barrels of oil per day.
Currently, legislation is being passed in the Iraqi government that clarifies the
issues of revenue sharing that favor the Kurdistan province. The influence of Kurdish politicians
in Baghdad have drafted a law that has essentially concentrated the KRG’s national revenue in
the Kurdistan province and constrained the central government in Baghdad from exercising any
form of monetary control in the region in Kurdistan. According to the law, operational spending
would only be granted to the Iraqi government only in accordance with the constitution. Thus,
Baghdad had evolved as merely a mechanism of revenue distribution as opposed to a central
governing authority. Kurdish efforts are based on a strict interpretation of the constitution
which is based on the American political model of decentralization and revenue sharing.
Kurdish political efforts toward decentralization have contended by prime ministers al-
Maliki’s al Dawa party as well as independent Islamist Shi’i in the government and had nearly
evolved into a violent conflict. Under al-Maliki, the government in Baghdad had refused to
recognize contracts between international companies and the KRG. Meanwhile, passage of
important laws regarding the oil industry in Iraq are unlikely to occur since there is a political
stalemate between the central government in Baghdad and KRG in which both parties have
competing objectives that is unlikely to yield compromise. Legislative decisions are based on
the textual ambiguities of the constitution, creating confusion on both sides.