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Where has Iraq's oil wealth gone?

Iraq, which sits on some of the world’s largest oil reserves, remains one of the poorest countries in the region.

March 20, 2023 at 11:06 am

Iraq is the second-largest crude oil producer in OPEC after Saudi Arabia. Yet despite the country’s vast oil wealth and significant revenues from crude oil exports, Iraq imports some 40 per cent of its gas from Iran and is still struggling to meet the basic energy needs of its residents. Severe shortages in power supply and energy have left many households with only a few hours of electricity per day and a lack of clean and hot water.

Twenty years since the war to ‘liberate Iraq’, the promise of a prosperous, oil-financed and democratic Iraq has yet to materialise. The legacy of the US-led war on Iraq has been characterised by political instability, sectarian violence, corruption and a failure to establish a sustainable and accountable government. While the 2003 invasion may have removed a dictator from power, the US-led reconstruction effort has failed to establish a transparent and accountable system, leaving Iraq struggling to rebuild and establish a functioning democracy.

For years since the US-led invasion, the lack of political stability and security not only devastated the country’s economy, infrastructure and social fabric but also meant Iraq was unable to attract significant foreign investment. This was exacerbated by the emergence of extremist groups such as Daesh. Iraqis, however, have been battling another perhaps more pervasive issue – corruption.

Corruption and mismanagement

In October 2022, a probe uncovered a staggering $2.5 billion of embezzled tax funds, in what was described as the ‘heist of the century’. The embezzlement case, which involves a network of senior officials, politicians and businesses, is only one of a number of major corruption scandals which made headlines in the country amidst estimates of nearly $320 billion lost to corruption from the state coffers in the 15 years after the Saddam era.

Officials and politicians in Iraq are often accused of syphoning off public funds and resources for personal gain, including oil revenues. From ghost salaries and ghost employees, to bribery and even oil smuggling, this rampant corruption which has plagued Iraq for decades has greatly reduced the amount of funds available for investment in the country’s inefficient energy sector, its infrastructure and economic development overall.

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Despite being a major producer of crude oil – with exports in March 2022 bringing in a record $11.07 billion in revenue, the highest since 1972 – Iraq’s limited refining capacity and inadequate infrastructure have left the country reliant on the import of refined petroleum products to meet domestic demand, mainly from Iran.

Combined with poor governance and the absence of accountability, a lack of transparency has hindered the country’s ability to effectively manage the distribution of its oil wealth; leaving the public with little information on how oil revenues are being spent and how contracts are being awarded.

Ongoing disputes

The central government in Baghdad has also been seeking – and failing to assert its control over – some of the country’s oil-rich regions, particularly in the Kurdish-controlled areas in the north.

While the majority of Iraq’s oil wealth is located in the southern and southeastern regions of the country, where vast oil fields are located, the Kurdistan Regional Government (KRG)-controlled region in the north of Iraq is also home to significant oil reserves, estimated to be around 45 billion barrels. The KRG began exporting oil independently in 2014, in defiance of the central government in Baghdad, with the establishment of its own pipeline to Turkiye.

The Baghdad government, which manages and regulates the oil industry including the production and export of oil, opposed the KRG’s independent oil exports, and the two sides engaged in a legal dispute over the matter. In February 2022, Federal Iraq’s Supreme Court ruled that the KRG’s production and export of oil and natural gas is unconstitutional and that all contracts between the KRG and international oil companies are illegal. The ruling was rejected by the KRG and the dispute remains.

Iraq’s oil wealth remains a key driver of its economy, but the country faces serious challenges in addressing the significant gap between supply and demand and effectively managing and distributing its resources for the benefit of its citizens, whose daily lives are impacted by the lack of reliable energy, with businesses and schools forced to close during power cuts and many households resorting to generators or other alternative sources of power. Fueled by widespread dissatisfaction with the government’s corruption, economic mismanagement and failure to provide basic services, a series of massive demonstrations erupted across Iraq in October 2019 demanding change.

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Iraq has recently been looking less towards America and more towards China for the development of its energy sector, highlighted by the 2019 ‘oil for construction’ deal. In February 2023, the country signed deals with Emirati and Chinese companies to develop its gas and oil fields in a bid to become more self-sufficient and reduce dependence on Iranian imports. The government of Prime Minister Mohammed Al-Sudani has also announced the dismantling of the largest oil smuggling network in the Basra Governorate, which involves high-ranking officers and senior staff.

With an estimated 145 billion barrels of proven oil reserves and significant untapped oil resources, Iraq has the potential to address a lot of its deep-seated economic challenges. But one thing remains clear, effective governance and transparency are crucial if Iraq is to successfully capitalise on its oil wealth and direct it towards the development of the country to meet the needs and demands of its citizens and provide stability.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.