March 4, 2004 | Executive Summary on Iraq
Executive Summary: Models and Policies for Oil Production, Revenue Collection, and Public Expenditure: Lessons in Iraq
Countries in both the developed and
developing worlds rely on a stable and secure supply of oil.
However, abuses and misallocations of oil revenues often lead to
social and political instability and, at times, armed conflict. The
broader the political cooperation and public consensus, and the
greater the transparency in the management of oil revenues, the
greater the chance that the supplier will remain stable.
challenge of devising models and policies for oil production in
developing or transitional economies is formidable. Resource-rich
countries tend to fall behind non-oil economies in economic
development, rate of growth in gross domestic product (GDP), GDP
per capita, and human development. Oil often derails democratic
development, causing civil strife and civil war. Other problems
such as graft and "rent-seeking behavior" regularly accompany oil
exploration and exploitation.
private and transparently managed international oil and gas sector
is vital to global energy security and, thus, in the national
interest of the United States. Returning Iraqi oil to the
international oil markets is important for the Iraqi people, the
United States, other Western countries, and the global economy.
Creating the New
Iraqi Oil Industry
The Coalition Provisional Authority and the Iraqi Governing
- Initiate a public debate about
development of the rule of law and property rights, including
mineral rights. This should include Western economists, Iraqi
officials, and the public and should cover the future of oil
production, taxation, and the distribution of income. As part of
the debate, the CPA and IGC should conduct a comprehensive public
campaign aimed at privatization of oil and gas industry assets and
reserves as well as broad institutional reform. Many Iraqi
officials and other members of police and media elites are not
aware of the macroeconomic factors that support privatization. It
keeps the oil revenue out of government's hands and institutes
publicly accountable and transparent decision-making processes on
property rights and the rule of law, including enabling legislation
and regulations on oil and gas production that allow private
ownership of all productive assets and minerals. This also involves
fostering an independent judiciary, training judges to handle
complicated civil litigation such as energy law, and allowing
international arbitration as well as enforcement of arbitral
a comprehensive audit of state-of-the art techniques of oil
privatization, revenue generation, and management. This information
should then be disseminated to the Iraqi political leadership,
management of the oil and financial sectors, and broader elites.
U.S. institutions (e.g., the CPA and U.S. Agency for International
Development), major oil companies, nonprofit organizations, the
International Monetary Fund, and the World Bank should all be
involved in this undertaking.
that privatization is both transparent and perceived as being in
the interest of the Iraqi people.
safeguards to prevent smuggling and diversion of oil and refined
products from "well to wheel" and create a law enforcement climate
in which the diversion for private use and theft of crude oil,
refined products, or revenue is reported, prosecuted, and
revenue collection, such as taxation of oil sales, by establishing
independent audit procedures, supporting public supervision by bona
fide non-governmental organizations (NGOs), and developing an
in creation of a national, private, professionally and
independently managed oil fund. This could be a modified version of
the Alaska arrangement, allowing for direct deposits of revenues
into the private bank accounts of the Iraqi people, and would go a
long way toward legitimizing the future Iraqi government and
privatization of oil assets.
open budgetary and legislative processes for oil revenue. As part
of the open budgetary process, budgetary drafts must be prepared by
legislative and governmental budgetary offices and publicly
available before the final vote. NGOs should be allowed to
participate in such discussions, thus enhancing the development of
civil society in Iraq.
Privatization should be undertaken only after a public
education campaign and good-faith effort to build a consensus among
the Iraqis that private ownership of industrial assets, including
commodities, is economically more efficient than a government-owned
revenue from Iraqi oil should be transparently managed, adequately
taxed, and protected from government abuse and corruption. To
facilitate this process, a professionally managed oil fund should
be seriously considered. Such a fund would protect oil revenues
from the long hands of the Iraqi politicians. As in the Alaska
model, part of the revenue should be distributed directly to the
bank accounts of every Iraqi.
These are only some of the answers and
challenges facing state oil revenue management. Those tasked with
solving these problems owe the people of Iraq their best efforts
not to repeat the abuses of the past.
Ph.D., is Research Fellow in Russian and Eurasian Studies
and International Energy Security in the Kathryn and Shelby Cullom
Davis Institute for International Studies at The Heritage