February 20, 2007
Minaret of Freedom Institute
The situation in Iraq will not stabilize until the issue of the oil (and gas) industry is resolved. Accusations are flying that the new oil legislation under consideration will throw open the Iraqi oil and gas wealth open “for large-scale exploitation by Western oil companies.” That is only the tip of the iceberg.
Article 111 of the new Iraqi constitution “declares Oil and Gas as the property of the whole nation in all Its Provinces and Governorates….” The challenges of balancing the needs of investment, revenue sharing, technical skills, etc., etc. have been thrust into the hands of a nascent democratic political system that hasn’t got its sea legs.
A political solution to what is an economic issue is not promising for many reasons. The main obstacle is that it is virtually impossible to negotiate politically over oil revenues. Hitherto, the oil of Iraq was conceived to be a national resource, collectively owned by the people of Iraq and managed as a trust by the Iraqi government. Unsurprisingly, this resulted in the oil being managed for the benefit not of the Iraqi people, but of the managers, i.e., the government, i.e., the Baath Party, i.e. Saddam Hussein and his cronies. This is not to say that the people received no benefits at all. Like all politicians, Saddam knew he had to pass out favors in order to keep people in line, so Iraq had comprehensive single payer health care and other such socialist goodies. What it didn’t have was freedom, efficiency, and justice.
If we are serious about Iraq making a transition to a free society, we must acknowledge that leaving the government as the trustee of the oil that actually belongs to the Iraqi people means that a fox is still guarding the henhouse—it’s just a different fox. Before it was the Sunni-dominated Baathists. Under a “democratic” system it will be the Shia-dominated voters. Notwithstanding a relatively strong national identity, the Iraqis still see themselves as three affinity groups: the (mostly Sunni) Kurds, the Sunni Arabs, and the Shia Arabs. The Sunni Arabs who got the lion’s share still want it, but the Shia majority expects that they should get it, as do the Kurds. Any political solution is a winner-take-all solution in which the best the losers can hope for is a sop that will keep them from outright rebellion. Under current circumstances in Iraq, that seems too much to hope for.
This does not mean that the situation is hopeless, however. While the Iraqis have little experience at parliamentary negotiation and compromise, they are very skilled in economic bargaining. Privatize the Iraq oil industry, not as a single “Iraqi National Oil Company” whose ownership is vested in an “Iraqi Federal and Oil Gas Council,” but as a checkerboard of local oil companies whose shares will be distributed among all Iraqis according to formula to be decided by negotiation. In a framework that says all Iraqis get x shares of every oil company plus y shares of the oil company that is in their own province, plus z shares of every oil company in their own region, with bonus shares to go to employees and management, etc. then the only thing left to do is negotiate over the values of x, y, z, etc., and at that type of negotiation the Iraqis are old hands. They will be comfortable and can use their skills honed in the bazaar to arrive at a deal everyone can live with. (Notice that this is NOT the privatization scheme that was such a disaster in Russia. In this plan the shares of ownership go to all the people of Iraq, not to an elite mafia.)
Within this economic framework, the remaining issues become tractable. Don’t want to give voting shares of stock to children under 15? Put those shares I a trust held by the parents and turned over to the children at age 15, 16, or whatever you end up negotiating. Afraid that Iraqis have insufficient familiarity with joint stock companies to understand what it means to be a shareholder? Prohibit sale of shares for a period of, say, two years until they’ve had a chance to vote in a couple of elections and receive several dividend checks. Afraid that Iraqis will sell their shares at fire sale prices to foreign oil companies before they realize how valuable the shares really are? Prohibit foreign ownership for a period of time to be negotiated, say, four years. (This will not preclude foreign expertise and participation, since foreigners could work under contract to the Iraqi firms.) Afraid the government will veto the idea because they want the oil revenue? Instead of the complex system of royalties and taxes on licensing which is proposed in the legislation in its current form, let the government collect a single tax at the well-head of, say 20%, which will give them a good revenue, especially if the oil industry becomes more productive under private ownership. Afraid the government will veto the whole project because, well, just because they’re a government and don’t want to let go? Let the government have a minority share of stock so that they too can participate in the potential profits.
The legislation now under consideration shows the influence of Iraqi bureaucrats and politicians and of foreign oil companies. It needs to be revised to show a concern for the development of free markets in Iraq and for opportunities for the Iraqi people to become the owners of their natural resources in fact and not only in name. Above all it needs to provide an incentive for every Iraqi to and to see the industry prosper while at the same time offering opportunities for them to help to contribute to that prosperity by making them private owners with the associated rights and responsibilities.