- The Washington Times - Thursday, April 17, 2003

With the coalition of the willing having vanquished Saddam Hussein's regime in Iraq, it is now up to the "coalition of the drilling" to provide the resources to underwrite Iraq's political and economic development after decades of repression and economic mismanagement. Let there be no doubt: Iraq's immense oil and gas reserves 112 billion barrels of proven oil reserves; at least another 100 billion barrels of potential oil reserves (and probably much more); and more than 250 trillion cubic feet of proven and probable natural gas reserves are adequate to finance Iraq's short-term reconstruction and long-term development.

The only question of significance is this: Will Iraq be permitted to exploit its natural resources to finance its transition to an industrial democracy, a development that would indisputably represent an incalculable achievement in a highly unstable region during these very precarious times? Phrased differently: Has the world learned the clear lessons of America's post-World War II benevolence to Germany and Japan, or will the 23 million innocent, long-repressed Iraqis be treated the same way that the victors treated Germany's defeated population after World War I?

In a disastrous policy that contributed in part to the rise of Hitler, the victorious allies following World War I attempted to collect more than $30 billion in reparations from Germany. The reparations were double the size of Germany's annual gross domestic product (GDP) at the time. Nobody knows for certain how large Iraq's foreign debt is today. Relative to its economy, however, Iraq's external debt is almost certainly the largest in the world. A recent analysis by the Center for Strategic and International Studies (CSIS) estimates that Iraq's foreign debt approaches nearly $400 billion. That would make it more than 15 times the size of Iraq's current GDP of about $25 billion.

Nearly $200 billion of Iraq's estimated foreign debt relates to unpaid settlements and unsettled claims arising from Saddam's 1990 invasion of Kuwait and the subsequent war to dislodge him. Including accrued interest, Iraq has another $125 billion in sovereign external debt, most of which was incurred during the 1980s, when Iraq waged an eight-year war against Iran. Much of that debt is also owed to Arab nations in the Persian Gulf region, which, at the time, were fearful that Iran's Shi'ite revolution might soon overwhelm their Sunni monarchies. Also included in this $125 billion are debts owed to France (an estimated $8 billion) and Russia (between $8 and $12 billion), which supplied Saddam with weapons. Finally, the CSIS study calculates that Iraq has signed $57 billion worth of economic-development contracts with other nations, 90 percent of which are with Russia for oil exploration.

Do the math. Even excluding the pending contracts, which clearly need to be renegotiated by Iraq's next government, Iraq's foreign debt, including war claims, could still exceed $300 billion. Servicing such a debt at a nominal interest rate of 5 percent would cost $15 billion per year; and that doesn't include principal payments.

A recent U.S. Department of Energy analysis reported that "oil industry experts generally assess Iraq's [current] sustainable oil production capacity at no higher than about 2.8-2.9 million barrels per day, with net export potential of around 2.3-2.5 million barrels per day." As the nearby chart reveals, exporting 2.5 million barrels per day at a price of $25 per barrel (the midpoint of OPEC's desired range) would generate $22.8 billion a year for Iraq.

As the chart confirms, in the short run Iraq cannot conceivably service its debt, make payments against the principal, refurbish its dilapidated oil sector and finance its reconstruction. But the chart also confirms that Iraq's oil wealth could over the long term finance its reconstruction, if the burden of its external debt is substantially relieved. With an export potential of 7 million barrels per day achievable within about six years, Iraq could be generating about $64 billion per year at a price of $25 per barrel.

Just as Yugoslavia received a five-year moratorium on its debt payments in 2001 following the removal of its dictator, so too must Iraq receive a comparable delay now. Over that time, as Iraq expands its oil sector and finances its democratic evolution, long-term debt renegotiation can take place, while Iraq's neighbors and the rest of the world decide whether they want to repeat the aftermath of World War I or the aftermath of World War II.



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