Iraq’s oil dysfunction

As Iraq marks 19 years since the US-led invasion and the fall of former Iraqi President Saddam Hussein's regime this month, the country hasn't turned into the stable, prosperous democracy that the United States and its allies promised and Iraqis hoped it would.

Militias roam the country, corruption is rife, basic services are still lacking, and the country's politicians have been unable to form a government in the six months that have passed since the last national election.

But nothing better symbolizes Iraq's dysfunction than the absurd fact that the world's sixth-largest oil producer still suffers from fuel shortages and power outages as it struggles to supply its own population with fuel and electricity.

On average, a household in Baghdad gets six hours of electricity a day from the national grid. Those who can afford it pay for private generator providers to cover the shortfall. For the millions of people who cannot afford the exuberant prices, power can be out for hours on end daily. In addition to daily suffering without power, much of Iraq's economic activity is affected. Businesses cannot flourish when electricity sources are unreliable.

While Iraqi politicians are quick to point to the fact that energy demand in the country more than quadrupled in the past two decades, the reality is that Iraq would be capable of producing enough electricity to meet that demand if sufficient planning were put in place and corruption weeded out. Experts point to losses in transmission and Iraq's electricity distribution being among the worst in the world—a matter that could be solved with investment and effective governance in the sector.

Furthermore, private electricity generators are a source of income for some militant groups and influential businessmen who often work behind the scenes to disrupt electricity provision. Extremist groups also regularly target the electricity sector. In 2014, Islamic State militants captured and destroyed the Baiji power plant, located approximately 150 miles north of Baghdad. Today, seven years after Baiji's liberation from Islamic State control, the plant's reconstruction has yet to begin, despite projects having been awarded—proof once again of the many problems with governance in Iraq. In December 2020, a parliamentary committee declared that $81 billion had been spent on the sector in the past 15 years, with little to show for it.

Electricity is just one dimension of a complex energy dilemma in Iraq. As oil prices increase, a number of Iraq's cities face increased fuel shortages. Motorists in the city of Mosul can sit in line for up to an hour to fill their cars. Part of the shortage is due to the smuggling of fuel to Iraq's Kurdistan region, where fuel prices are double those in other parts of the country, where fuel is more heavily subsidized. Some is smuggled to Syria, reflecting the wider crises in the region.

Iraq's dysfunctional energy sector also impacts its environment. Private generators, which make up approximately 20 percent of Iraq's electricity provision, run on diesel fuel, adding to Iraq's pollution. Gas flaring, the burning of natural gas that is a byproduct of oil extraction, is among the worst polluters, yet Iraq continues to flare more than half the natural gas its oil fields produce.

Solutions are readily available, such as projects overseen by the Basrah Gas Co.—a joint venture between Iraq's South Gas Co., Shell, and Mitsubishi—that work to capture gas for domestic use. Developing gas capture, in which Iraq is meant to invest $3 billion over the next five years, will be vital to reducing Iraq's illogical dependence on Iran for gas imports—reaching up to 50 million cubic meters per day at their peak.

If the $3 billion investment is spent on gas capture projects and a reduction of gas imports from Iran, the benefits would be a reduction of the extortionate bills paid to Iran for gas and an improvement in Iraq's environment. In February, Iraq's acting electricity minister, Adel Karim, said Iraq is $1.6 billion in arrears on payments for imports of Iranian gas. Ironically, Iraq is gas rich in a number of locations, including in the Kurdistan region, but political wrangling blocks its proper development.

Another layer of complexity in the energy mix is the lack of a hydrocarbons law in the country that can regulate this and other matters. That has allowed for an increased politicization of the energy issue, including Iraq's federal court deciding that the Kurdistan region's oil exports were unconstitutional—after years of not passing a judgment on the matter.

The Kurdistan Regional Government (KRG) has been extracting and selling crude oil, independent of the federal government and Iraq's Oil Ministry, for years and in 2007 passed its own oil law. In February, Iraq's supreme court handed a win to the federal government by decreeing that oil should be administered at the federal level, in line with the constitution. The ruling also forfeited the KRG's contracts with foreign companies, without which the Kurdistan region would struggle to maintain its energy sector.

The energy portfolio is at the heart of Iraq's political, security, and economic crises. Smuggling of Iranian oil through Iraq has helped Tehran circumvent sanctions, and it is keen to maintain that lifeline, especially as nuclear talks falter. Iran has tried to influence Iraq's oil sector, particularly in the south, but is meeting increased resistance.

Furthermore, the corruption that hamstrings Iraq's public life is tied to the energy sector, from private generator gangs to oil contracts divvied out among different political groupings. Since elections last October, the country's political parties have worked themselves into political gridlock.

Meanwhile, Iran is working furiously to influence the next government formation, fearing the exclusion of its proxies. Iraqi Shiite cleric Moqtada al-Sadr, whose candidates won 73 seats in Iraq's 329-seat parliament, has the right to form the next government as part of a majority coalition. Sadr has been the most vocal of Iran's critics among the Islamist Shiite parties in Iraq and has joined forces with the Kurdistan Democratic Party (KDP), led by Masoud Barzani, and the Sovereign coalition, led by the speaker of the parliament, Mohammed al-Halbousi. Some Kurdish officials believe the court's ruling is part of efforts to pressure the KRG to acquiesce on government formation.

As Iran and its proxies fight the formation of a government that excludes their influence, the energy sector in the Kurdistan region has come under increased attack. In addition to the federal court's decision to stop oil exports, there have been physical attacks on the energy sector. On March 13, Iran publicly claimed responsibility for a series of missile strikes on the home of Baz Karim Barzinji, the CEO of the KAR Group, an Iraqi Kurdish oil company. While Tehran claimed the attack was against Israeli "Mossad agents," an assertion both the Iraqi government and the KRG denied, the message was that Iran wants to exert maximum pressure on the KDP and show its ability to strike vital lifelines. An attack on a KAR-owned oil refinery three weeks later further reinforced that message.

If not for all this dysfunction, with the global rise in oil prices, Iraq would be well positioned to capitalize on its energy resources going forward. In March, Iraq's oil revenues were $11 billion, the highest in half a century, according to the Oil Ministry. With Iraq's budget based on oil prices at $55 per barrel, the windfall from high prices could provide a rare opportunity to invest in the country's infrastructure, particularly in its energy sector.

However, the reality is much more complex. Iraq's overreliance on oil, with its revenues accounting for 92 percent of government budget revenues, means that little is done to diversify Iraq's economy. With higher oil prices, what little incentive exists to resuscitate Iraq's industrial and agricultural sectors dissipates as officials fall back on oil as the main revenue driver. Furthermore, divisions between Baghdad and Erbil over oil become more complicated as higher revenues are at stake.

Without a government in place and with ongoing political infighting, chances for reforms are slim. As Iraq heads into another heated summer, with temperatures frequently surpassing 50 degrees Celsius (122 degrees Fahrenheit), the fear is that more revenue will simply mean more corruption and the continued siphoning off of Iraq's riches.

Mina Al-Oraibi is a columnist at Foreign Policy and the editor in chief of the National. Twitter: @AlOraibi

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.