How Iraqi Oil Is Changing the World

OPEC could be in for a serious shake-up.

When the world's top oil-producing countries sat down today in Vienna, there was a new 800-pound gorilla joining them in the room. It's not a rising oil price, which now hovers at $80 per barrel; nor is it the U.S. Federal Reserve meetings, where governors will likely leave interest rates near flat. No, the 800-pound gorilla is far closer to home for most members of OPEC: It's Iraq.

If Baghdad's own projections are to be believed, Iraq could match Saudi Arabia's daily crude output of 10 million to 12 million barrels within the next seven years, up from just 2.5 million barrels today. That means price stability, OPEC's sine qua non, could go from being Saudi Arabia's solo prerogative to a shared franchise of two states: one an entrenched monarchy, the other an unruly democracy with an uncertain future. And since Iraq held a successful tender for new oil exploration work in December, the country's oil minister, Hussain al-Shahristani, has made it clear that Baghdad will ramp up production regardless of any restraints agreed upon by the world's oil cartel.

It would be quite a change from the near hegemony that Saudi Arabia enjoys within OPEC today. For decades, Saudi Arabia has served as the world's central banker of oil supplies. In unstable times, most famously in the wake of Iraqi's 1990 invasion of Kuwait, it has drawn from its spare production capacity of some 1 million barrels to bring prices to heel. Today, Iran weighs in at a distant second place within the cartel, producing just over 4 million barrels per day. So at this week's OPEC meeting, members paid Saudi Oil Minister Ali bin Ibrahim al-Naimi the appropriate levels of deference and respect. When Naimi appealed to his counterparts to keep production limits in place for the sake of a still-fragile global economy, most of them obeyed. When he departed for his ritual morning jog along the Viennese boardwalks, they likely said a quiet prayer for his safe return.

Iraq's revival as a prominent oil exporter is bound to reshuffle a careful power balance in the energy-rich Arab world, particularly between bitter rivals Saudi Arabia and Iran. Saddam Hussein's 2003 toppling created a vacuum that both sides rushed to fill, for example deploying proxy forces at the height of Iraq's sectarian civil war. OPEC is another battlefield for the Saudi-Iran rivalry, and the Saudi kingdom is in no hurry to lose its uncontested status as No. 1. Now, as Iraq stabilizes politically and slowly rebuilds its oil-production capacity, both sides will have to accommodate a more assertive Baghdad. Even if oil production doesn't reach the Iraqis' goal, it will likely be higher than the approximately 1.7 million barrels per day that Iraq was producing just prior to the U.S. invasion.

"The Iraqis are saying, 'Look, we're not going to be on par with Iran; we have to be equal with Saudi Arabia,'" says Raad Alkadiri, an Iraq expert at PFC Energy, a Washington-based consulting firm. "They note how OPEC has benefited from the fact that Iraq has not produced to its potential, and given its reconstruction demands, its need of revenue must be acknowledged."

So the emergence of Baghdad as a rival to Riyadh could lead to some rancorous deliberations within the cartel. Naimi, highly regarded as a consensus-builder, will have to work overtime to win over Iraq when it comes to price targets; the last thing he'll want is a revitalized Baghdad openly defying production ceilings for the sake of revenue. He already has his hands full dealing with inveterate quota smashers like Iran and Venezuela, who routinely oversell to pay for their costly entitlement programs.

Of course, Iraq won't be ramping up production tomorrow. The biggest obstacles are political, not technical. Iraq's politicians, divided as they are along ethnic and sectarian lines, have yet to pass a petroleum law. The recent parliamentary elections are only expected to complicate matters, particularly as Iraq's Arab and Kurdish constituencies battle over who will control oil-rich Kirkuk.

Iraq also has yet to rebuild the expertise needed to develop its energy resources, and it will have to rely heavily on foreign help. The country's fraternity of energy elites, once considered the Middle East's finest, was scattered by decades of war and sanctions, followed by the U.S. invasion and the chaos that followed. To compensate, the best the Oil Ministry can do is usually to dispatch teams of administrators to work with foreign developers on new projects.

But though the challenges are clear, the country's projections are not entirely unfeasible. Having cleaned up the Iraqi Oil Ministry of the corruption that thrived under his predecessor, the resourceful Ahmed Chalabi, Shahristani has awarded a series of development contracts to oil giants ranging from independents like BP to state-controlled companies like China's Sinopec. They are structured so that the faster the developers pump oil, the greater will be their returns on investment. And even if Iraq could more or less double its daily crude output to 5.5 million within the decade, as Alkadiri and other oil analysts say is a more reasonable target, it would become the second-largest OPEC member, surpassing Iran.

That would effectively transform OPEC into a bipolar cartel, one in which close coordination between Riyadh and Baghdad would be vital for price stability. A mere ripple of tensions between the two sides, be they over production quotas or worse, geopolitics, could have dire consequences for energy markets.

Shahristani appears to have no delusions about how difficult the path he has set for himself will be. Although not a career oilman like Naimi, who learned his trade as a boy working for the Americans who controlled the Saudi oil industry before it was nationalized, Shahristani is at least shaping up to be a worthy junior partner.

That would be just the kind of gradual transition that reassures oil markets -- if not the Saudis.



Rafsanjani Makes His Move

Iran's most independent politician finally casts his lot with the hard-liners. Is this the end for the green movement, or just the beginning?

Iran's most watched man has finally made his move. Akbar Hashemi Rafsanjani, a former president and the country's most skilled political operator, had been sending mixed signals since the contentious June election, one day appearing sympathetic with the opposition and the next declaring his loyalty to the regime. Throughout this long political dance, both Supreme Leader Ali Khamenei and the opposition "green movement" appreciated that securing the allegiance of Rafsanjani, a key player in Iranian politics since the Islamic Revolution, would represent a significant victory.

Now, Rafsanjani appears to have decided to place his bets with Khamenei. And it turns out that Rafsanjani's cultivated reputation for independence might be exactly what the supreme leader needs right now.

Since the June 12 presidential election, the only constant during Rafsanjani's long period of fence-sitting was his display of contempt for Iranian President Mahmoud Ahmadinejad and his cadre of hard-liners. The rift between the two men goes back many years. Rafsanjani lost to Ahmadinejad in the 2005 presidential race, a contest Rafsanjani implied was rigged by the hard-liners. The tension only intensified during the 2009 presidential election, when Ahmadinejad, in a nationally televised debate, accused his rival Mir Hossein Mousavi of receiving support from corrupt officials, such as Rafsanjani. Rafsanjani then sent an unprecedented letter to Khamenei, complaining about Ahmadinejad's "lies." He called on Khamenei to extinguish the "fire" sparked by Ahmadinejad.

Recently, Rafsanjani had even refused to be seen in public with Ahmadinejad, and he was conspicuously absent from the president's inauguration ceremony.

The green movement had hoped that Rafsanjani's well-known recent rivalry with Khamenei, as well as his distaste for Ahmadinejad, would secure his influential support. Their hopes were raised particularly on July 17, when Rafsanjani delivered a Friday prayer sermon in Tehran. The Friday sermons are used to discuss burning political issues, and Rafsanjani took the occasion to criticize the regime's heavy-handed crackdown against the opposition. He called for releasing political prisoners, freeing the media, and preserving the rule of law. "Don't let our enemies laugh at us by putting people in prison," Rafsanjani told worshippers. "We must search for unity to find a way out of our quandary."

Rafsanjani also said that Iran should be ruled as a "republic," a deliberate criticism of the dictatorship evolving since the June demonstrations. After this speech, the regime punished Rafsanjani by banning him as a Friday prayer leader, ending his long-held influence in the post.

But over the winter, the field began to shift in the opposite direction. Rafsanjani might have been concerned about the risk of political irrelevancy if he continued to stay distant from the regime. And with the opposition still weak, joining it would have severely curtailed his ability to stay in the political mix. The first sign of rapprochement between Rafsanjani and Khamenei came on Feb. 25, when the supreme leader paid a visit to the Assembly of Experts, an influential political body chaired by Rafsanjani. Khamenei, in a clear reference to Rafsanjani, took the opportunity to declare that Iranian leaders needed to decide if they were with the state or the "enemy" -- that is, with the opposition. Photos published in state-run newspapers showed the two men sitting nearly cheek to cheek.

Then, at a March 4 event to celebrate the birthday of the Prophet Muhammad, which was attended by Khamenei, high-ranking Iranian officials, and numerous foreign diplomats, Rafsanjani did the unthinkable: He appeared with Ahmadinejad.

The green movement is bitterly disappointed, but Khamenei is likely boosted, and with good reason: The very qualities that kept Rafsanjani independent so long are exactly what make him a suitable ally for Khamenei. Rafsanjani has much in common with mainstream conservatives who have long supported Khamenei, but he will never align himself with the new generation of influential hard-liners, led by Ahmadinejad and the Islamic Revolutionary Guard Corps (IRGC). In the June election's aftermath, other moderate conservatives, such as parliamentary speaker Ali Larijani, briefly seemed to part ways with the supreme leader on certain issues as well. With Khamenei unable to count on his traditional loyalists, Rafsanjani's support comes at a crucial time.

Khamenei, appointed supreme leader in 1989, has proved in the past to be an astute politician who rules by consensus. But now his power has been undermined by the worst political crisis in Iran since the 1979 Islamic Revolution. His grip has weakened over institutions such as the IRGC, the judiciary, the parliament, the Guardian Council, and even the presidency.

In exchange for Rafsanjani's loyalty, the supreme leader appears to have given him power over a new bill that will establish a National Elections Commission to reform the electoral process. Not only is this issue at the heart of Iran's political crisis, but the commission would also determine the eligibility of individuals to stand as candidates in elections. And the Expediency Council, which monitors legislation and is responsible for any conflicts that might result over Iranian laws, will also decide the members who serve on the National Elections Commission.

This significant change in the elections process will greatly reduce the power of the Guardian Council, a body of six hard-line clerics and six jurists appointed by Khamenei. Historically, this Guardian Council has banned many reformist candidates from running in elections, thus ensuring conservative control even in the face of growing public discontent. The guardians were also charged with hearing complaints about election fraud and complaints from banned candidates contesting their exclusion. Now, the National Elections Commission will hold some of these responsibilities.

By bringing Rafsanjani back into the fold, Khamenei appears to be trying to reduce the power of the hard-liners, including some of those who sit on the Guardian Council. It is true that reforming Iran's electoral process is one step toward a less totalitarian regime. However, it is unlikely to pacify the millions of Iranians who consider themselves part of the opposition. If Khamenei had made this decision soon after the June election, its effects would have, perhaps, been different. But now, many in the opposition have far greater demands, including Ahmadinejad's resignation.

Therefore, at least for now, the green movement is taking Rafsanjani's return to the fold as a setback. With his independent voice now subsumed into the hard-line camp, there is no doubt this development will lead him to curtail his recent criticism of Ahmadinejad and Khamenei. It is also likely that, even with the new National Elections Commission, it could be years before Rafsanjani is able to bring free and fair elections to Iran. As Khamenei reaps the benefits of his renewed support, Rafsanjani may find his new commission a meager consolation prize.