Why Not Let China Pump Iraq’s Oil?

The Diplomat’s Zachary Keck challenges U.S. critics who have expressed outrage at the news that China – not America  - has become post-war Iraq’s biggest oil customer:

Overwhelming public discourse depicts global energy markets as operating according to Mercantilist economic logic, whereby consumer nations compete intensely to own the oil resources in producer nations as many of today’s consumer countries once owned the resources of their colonies.

But this misconstrues how global energy markets actually operate. Although China itself does actually seek to own some of partner nations’ oil resources, these deviations are not enough to change the fact that global oil markets operate according to the free-market principles of supply and demand. Therefore, a net increase in the global supplies of oil, no matter where it is exported, will result in a lower price of oil everywhere (all things being equal).

Thus, even if China was purchasing all of Iraq’s oil this would still benefit the U.S. and its allies because they could purchase oil elsewhere at a lower cost. By contrast, if China wasn’t purchasing Iraqi oil it would be purchasing oil from these other producing nations. If, in this latter scenario, Iraq wasn’t producing or exporting the oil it had been to China in the first one, every importing nation would be paying a higher price for their supplies.

The misconception over how oil markets operate has been at the heart of the U.S. anti-Iraq war campaign from the outset. In particular, it was seen in the “no more blood for oil” bumper stickers that every American anti-war advocate proudly displayed on their SUVs or other automobiles without the slightest sense of irony. [Source]

CNN’s Steve Hargreaves similarly writes that “the fact that so much of this investment is coming from China isn’t necessarily bad,” given the woefully low margins offered by the Iraqi market:

Royalties, taxes and other fees in Iraq typically take 90% or more of a firm’s profit. The comparable figure in the United States is somewhere around 50%. With the U.S. shale boom in full effect and deep water opportunities expanding worldwide, there are plenty of places oil firms can invest. In most parts of Iraq, the international oil firms don’t even get a cut of the profits — they are restricted to working on a contract basis.

“That is not how Exxon made its fortune,” said Fadel Gheit, a senior energy analyst at Oppenheimer. “Exxon wants a 20% or 25% return on its investment, not the 3% or 5% Sinopec is willing to work for.” [Source]

June 10, 2013 4:18 AM
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