< continued from - A Context of Distrust  [Part 3] >

Oil Rivals

With the close of the Iran-Iraq War in 1988, the intertwined issues of oil policy and debt relief came to the fore as sources of Iraqi-Saudi friction. Baghdad expected the kingdom and its Gulf Cooperation Council partners to help maintain high oil prices so that Iraq could generate the revenue necessary to service its war debt, not just within the Gulf but to non-Arab creditors as well. Saudi Arabia, however, was committed to a policy of price stability at moderate levels, a position it considered in its own long-term best interest as the holder of the world�s largest reserves and its stature as the key swing producer in the global market. The kingdom�s petroleum and financial technocracy had concluded by the 1980s that demand for oil was more elastic than many producers had previously believed. Specifically, they had been impressed by the measures taken in the West to improve energy efficiency and find alternative sources in the aftermath of the 1973 and 1979 oil shocks. 

The post-Saddam period promises to be another era of differences over oil policy between Riyadh and Baghdad. With crude prices reaching historic record levels -- even when adjusted for inflation -- and the Iraqi government in desperate need of cash, these differences will be temporarily masked. For the time being, both countries have a strong interest in producing oil at close to maximum capacity. The Saudis foresee a tremendous increase in demand for oil and gas, particularly from China, and therefore believe that there will be a more than sufficient market for all suppliers. Indeed, to some degree they will welcome the return of Iraqi supplies to the market, as Saudi Arabia will otherwise be called upon to make huge investments required to increase its own output. 

When and if the domestic situation in Iraq returns to something approaching normality, however, divergences will probably begin to appear. The Saudis recognize that, given its heavy debt burden and need for reconstruction, Iraq will be inclined to push the Organization of Petroleum Exporting Countries (OPEC) to maintain high price levels, while simultaneously pressing for generous production quotas for itself. The Saudis will probably welcome higher production quotas for Iraq as this would allow them to return some of their own capacity to reserves and maintain their traditional role of swing producer. For the same reason, the Saudis would like to see Iraq invest in expanding its own production capacity, although whether they would welcome what that would imply for the two countries� relative weights in OPEC is another matter. 

Yet if Iraqi expansion of capacity can be achieved only in an environment of artificially high prices, Riyadh can be expected to balk, fearing that prolonged high prices might trigger conservation measures and other forms of demand suppression in the consuming countries. The Saudis assert that prices in the range of $50 a barrel and up are "good for no one," meaning themselves and their customers. Their current stated preference is to bring prices down to about $35/barrel. Traditionally, the Saudis have insisted that the kingdom will use its market clout to keep prices stable and reasonable if others attempt to push them to what Saudi Arabia considers unreasonable levels.[16] From Baghdad�s perspective, by contrast, it would be hard to argue that the higher price range is "good for no one." In addition to helping Iraq address its debt and reconstruction needs, as already mentioned, high crude prices would also enable Baghdad to speed the generation of resources necessary to expand Iraqi production capacity. 

An issue that thus far has remained unraised, and which Saudis expect to remain so, is the status of the Iraqi Pipelines in Saudi Arabia (IPSA). These two crude-oil pipelines, which were built in the 1980s to circumvent the possibility of Iranian closure of the Strait of Hormuz, have a maximum (as opposed to optimal) capacity of 3.3 million barrels a day, more than twice that of the Kirkuk-Ceyhan pipelines across Turkey.[17] The IPSA lines were closed down in accordance with UN Security Council sanctions following the 1990 invasion of Kuwait and formally taken over by the Saudi government in 2001. In principle, they have since been integrated into the kingdom�s own crude transportation network, but, in fact, they are sitting idle, and there are reportedly no plans to activate them.[18] Saudi officials contend that, because the IPSA pipelines were built in the context of the Iran-Iraq War and there is now no danger that Iran will attempt to interfere with shipping out of the Gulf, Iraq has no reason to be dissatisfied with continued Saudi control of them. It would seem that a new government in Baghdad might disagree with that view. While not a pressing issue as long as Iraqi crude production continues to lag, as Iraq repairs its oil infrastructure it will be looking for every possible means to move oil to market, whether or not Iranian hostility threatens Gulf shipping. Baghdad might be expected to contend that Iraq paid for construction of the IPSA, that Saudi Arabia may have had a legal right to close it down after the invasion of Kuwait but not to seize it outright, and that in any event its return is necessary for Iraq�s recovery. Whatever the legal merits of the case, it is an issue that bears watching. 

In sum, Iraq�s logical oil policy would be to maximize near-term revenues, while Saudi Arabia�s would be to preserve long-term demand and its own market share. It is difficult to see how the two positions can be reconciled, but it is not difficult at all to imagine a return to the collision of oil policies -- this time, one hopes, without the military subtext -- that preceded Saddam�s invasion of Kuwait.

< continued - Reform in Iraq, Reform in Saudi Arabia  [Part 5] >

< Notes contained in Part 8 >

• Part 1 - Summary/Introduction

• Part 2 - The Primacy of Stability

• Part 3 - A Context of Distrust

• Part 4 - Oil Rivals

• Part 5 - Reform in Iraq, Reform in Saudi Arabia

• Part 6 - The Religion Card

• Part 7 - Working with Washington

• Part 8 - Conclusion

Complete Report (PDF):
Saudi Arabia and Iraq: Oil, Religion, and an Enduring Rivalry
Joseph McMillan

Complete Section:
Iraq and Its Neighbors - USIP

The views expressed in this report do not necessarily reflect views of the United States Institute of Peace, which does not advocate specific policy positions.