Iraq economy shrinking, despite oil


Iraq has the world's second-largest oil reserves, after Saudi Arabia

By Geoff Hiscock
CNN Asia Business Editor

(CNN) -- Iraq is sitting on oil reserves worth more than $3 trillion, but the country's economy is going backwards in 2002, the latest data shows.

A decade of economic sanctions against Saddam Hussein's regime since the 1991 Gulf War has left Iraq's oil-producing infrastructure in poor shape, according to U.S. government estimates.

As well, observers say Saddam has chosen to spend money on rebuilding his military strength, rather than attempting to diversify the economy away from oil or increase social capital.

The U.N. oil-for-food program has delivered some relief, as did increased oil production and prices in the mid-1990s.

But a downturn in oil prices in early 2001 and the new political dynamic after the September 11 terror attacks in the United States changed that.

Iraq was subsequently named by U.S. President George W. Bush as part of an "axis of evil", along with North Korea and Iran.

One consequence has been a sharp decline in oil imports by U.S. oil companies, and increased nervousness in some countries about trade ties with Iraq.

GDP likely to fall again

Bush asserted earlier this week that an end to Saddam Hussein's regime "is in the interest of the world."

Measured by gross domestic product, Iraq's economy shrank 6 percent last year and probably will contract again this year, according to the latest forecast by the Economist Intelligence Unit.

For Iraq's 25 million inhabitants, that means per capita income is now less than it was three years ago.

Compounding their unfavorable outlook is an inflation rate that is running at 50 percent a year -- an improvement from 100 percent five years ago, but still a massive drain on spending power.

Yet Iraq remains hugely important to the health of the global economy because of its key geo-political asset: more than 112 billion barrels of oil.

That is the world's second largest proven reserves, behind Saudi Arabia, according to the U.S. Department of Energy.

U.N. sanctions


An end to Saddam Hussein's regime is in the world's interest, according to U.S.President George W. Bush

Iraq also has 220 billion barrels of probable and possible resources, plus 110 trillion cubic feet of natural gas.

The problem for Iraq is that because of the U.N. sanctions, it can't sell all the oil it is capable of producing.

According to the U.S. Department of Energy, Iraq's average daily output last year was 2.45 million barrels a day, with about 2 million barrels a day legally exported under the U.N. program and the rest used domestically.

The Middle East Economic Survey this week says Iraq's production so far this year has been less than 2 million barrels a day, after an April-June slump. Output picked up again in July.

Hussein announced in early April that Iraq was stopping oil exports for 30 days to protest Israel's action against the Palestinians.

Industry experts believe Iraq is now capable of producing about 2.8 million barrels a day -- substantially down on the figure of 3.5 million it achieved in July 1990, a month before it invaded Kuwait.

Substantial spending

It needs to spend substantial amounts to upgrade its oil and gas production facilities, some of which were destroyed during the Gulf War. China, Russia and India are just some of the outside investors keen to be involved, but the continuing sanctions make that difficult.

Long-term -- and barring a U.S. strike against it -- Iraq aims to lift oil production to more than 6 million barrels a day. At $30 a barrel, that would be worth $65 billion a year, or almost three times the country's expected GDP this year.

The potential value of Iraq's oil reserves means there is a lot at stake in how Iraq acts over the next few months in response to U.S. pressure.

Along with a regime change, the Bush administration is demanding that Iraq cease any production of weapons of mass destruction and open the country to U.N. inspectors again.

The U.N. withdrew its inspectors in 1998 and the Iraqis refused to allow them back in.

According to the International Monetary Fund's most recent global outlook, a $5 a barrel permanent rise in the price of oil would trim global economic output by about 0.3 percent, with the United States and Europe each losing about 0.4 percent.