Oil, Iraq's Greatest Asset, Could Doom Its Future

Like one of those perverse twists in the tales of "The Arabian Nights" (many of which, you will recall, took place in Baghdad and Basra), modern Iraq's greatest source of prosperity—its vast reserves of oil and natural gas—could also be the biggest long-term threat to hopes for democracy.

Yes, on Sunday the Iraqis once again proved bravely, stubbornly, even astoundingly that they won't be kept away from the polls by mere car bombs and mortar shells. But by and large they were voting for the same coterie of politicians who've made Iraq among the five most corrupt nations in the world. The country's near-term future is just about waiting, after the election, for a new government to take shape over the next many weeks. But its long-term future could be haunted by what Stanford professor Larry Diamond calls "the oil curse."

How much oil are we talking about? Even after years of embargo, occupation, and civil war that weakened its production capacity, Iraq was the third-biggest producer in OPEC in January, according to the trade journal Petroleum Economist. The 2.45 million barrels it pumped every day, on average, would have brought in roughly $172 million—every day. In another three or four years, now that development contracts have been agreed with several major Western oil companies, that production could double, racking up income on the order of $125 billion a year. And that doesn't even begin to calculate the billions in revenue from largely untapped natural gas deposits. But …

"Not a single one of the 23 countries that derive most of their export earnings from oil and gas is a democracy today," Diamond noted in an essay earlier this year. Especially in Arab countries, the fabulous riches that come from under the ground tend to create overbearing governments with apathetic citizens. "In these systems, the state is large, centralized, and repressive," Diamond wrote. Societies are usually "intensely policed" because "there is plenty of money to lavish on a huge and active state-security apparatus," and bureaucracies are "profoundly corrupt." They tend to see the money that pours into state coffers as everybody's and nobody's, and therefore more or less free for the taking. The public pays no taxes in the richer states, and in the view of the entrenched potentates no taxation means no need for representation.

Precisely because the Iraqi government is not entrenched, however, there's some hope. "My view is a bit paradoxical," Diamond wrote me in an e-mail. Corruption is indeed "rampant," he said, and the institutions the Americans tried to create in Iraq to deliver better government accountability "have been overwhelmed by the common desire to loot the golden pot." But "there is so much oil wealth—particularly with what's likely to come on stream … that there will be plenty to steal and still some for development."

"I'm not cavalier about this," said Diamond, who served in the early U.S. administration in Baghdad and whose book Squandered Victorychronicled the way good intentions went horribly awry. But if all the major factions and provinces of the country feel they're getting their cut, then Iraq might "keep its political head just above water, though not without recurrent crises and uncertainty," Diamond told me. Not a comforting scenario, he said, but not a return to civil war, either.

In that same vein, oil analyst Ruba Husari in Baghdad tells me Iraqis often talk more about the need for federalism and decentralization than they do about the relative abstraction of "democracy." If they are going to get the basic public services and the jobs they desperately need—the issues that dominated Sunday's elections—the oil money has to be spread around. And Husari says there are positive signs that may be happening. Iraq's 2010 budget law has provisions for a portion of the income from each barrel produced in a given province or "governorate" to be paid back to it. There may be no comprehensive "hydrocarbon law" yet, but the article in the budget "is going to happen," says Husari. "The governorates are going to come at the end of the year and say, 'Where is our money?' "

Even if Iraq's rising oil and gas production does help to buy internal peace, however, it will pose an economic—indeed, a strategic—challenge to its most troubled and troublesome neighbor: Iran.

The government in Tehran already is having serious economic problems, and because embargos and boycotts have cut it off from a lot of Western oil technology, it has a very hard time raising its production of about 3.7 million barrels a day to compensate when prices fall. It wants to make sure that Iraq, which has been exempted from all OPEC quotas, will not start outproducing it, driving down prices and further crippling the Iranian economy. Already, skirmishing has begun behind the scenes at the oil cartel as Tehran tries to make sure quotas are imposed on Iraq before it can surpass Iran and perhaps even start to rival Saudi Arabia (which produces a whopping 8.2 million barrels daily and could go higher).

The more the mullahs feel competitive pressure from Iraq, the more likely they are to meddle in its internal affairs, whether with violence or, more subtly, through a democratic process where they try to control key players from behind the scenes. Getting to Iran's level of oil production in the next three years "will not be a big issue for Iraq," says Husari. "Whether Iran will accept it—that's the big question."

Such are the complications of the oil curse. You can take the petroleum out of the ground like the genie out of a bottle, but you can't be sure where it will take you. Aladdin would have understood.