What will happen to Iraq's oil?

The US and Britain are now on the verge of war with Iraq. The pretext for war is to prevent Iraq making 'weapons of mass destruction' and to destroy any stocks of such weapons it already possesses. But many commentators allege that another US aim is to open up Iraq's vast oil reserves for exploitation. What happens next in this crisis may determine what happens to Iraq's oil, where it goes and who makes the resulting profits.

Iraq has the second largest proven oil reserves of any nation - at least 112 billion barrels, along with 220 billion barrels of probable and possible resources, and large remaining unexplored areas. This is over a tenth of the world's entire known oil reserve. Iraq's production costs are amongst the lowest in the world at approximately $1 per barrel, compared to $4 in the US and North Sea, and $2.5 in Saudi Arabia. Iraqi oil is also desirably low in sulphur.

Current production is low. Much of Iraq's infrastructure is wrecked and some oil reservoirs may have been damaged by over-pumping, water injection or flooding. Most pipelines and transfer facilities are also damaged. Experts suggest a "sustainable" production capacity would be no more than a billion barrels a year, an increase of about a quarter on current production levels.

However, 417 new wells are planned. That's a lot of new business for someone. If Saddam's regime survives this crisis, these wells will be drilled by Russian, Chinese, Iraqi and Romanian companies. Some commentators suggest that, for about £20 billion in investment, production levels could be increased to reach two and a half to three billion barrels a year within five years. In the long run the potential may be even greater, as 55 of Iraq's 70 proven fields remain undeveloped.

US Secretary of State Colin Powell has said that Iraq's oil will be held "in trust for the Iraqi people" in the event of any invasion. But on who will get paid to take the oil out of the ground, and where it will go next, he has said nothing.

Although hampered by UN sanctions, Iraq has been busily signing contracts for the development of its oil resources. French and Russian companies have been particularly favoured. Major companies with deals in Iraq include TotalFinaElf, Russia's Lukoil, Zarubezneft and Mashinoimport, the China National Petroleum Company and Eni. This business would be threatened by the overthrow of Saddam's regime.

US oil companies do not hold development contracts in Iraq. Neither, with the exception of some potential small deals by Shell, do UK companies. As long ago as 1998, Chevron Chief Executive Kenneth Derr was enthusing about getting access to Iraq's reserves. Now, both France and Russia are worried that the Americans are talking to Iraqi dissident groups about scrapping existing contracts and providing preferential access for US companies. John Browne, the Chief Executive of BP-Amoco, recently expressed fears that the US would carve up Iraqi oil resources once the war is over.

A recent Deutsche Bank report entitled Baghdad Bazaar: Big Oil in Iraq suggested a potential conflict of interest amongst the permanent members of the United Nations Security Council over the commercial implications of war in Iraq. A regime change in Iraq would benefit US and UK oil companies while a peaceful resolution would benefit oil companies based in Russia, France and China.

These issues are vital to US national interests because the US economy remains an oil junkie in bad need of a fix. Industrialised countries consume almost 50 million barrels of oil each day, with the USA alone accounting for two-fifths of this.

The US Energy Information Administration forecasts that world demand for oil will rise by between 37% and 90% by 2020, depending on the rate of economic growth. The US alone is forecast to need another two to three and a quarter billion barrels a year over the same period.

US net oil imports more than doubled between 1985 and 2000 as US production fell and consumption rose. More than half the oil used in the US is now imported. By 2020, this dependence could rise to two-thirds. If the US were to get control of all or most of the product of Iraq's planned 417 new wells, total Iraqi production would be more than enough to meet the predicted increase in US consumption.

Two weeks after gaining power, President Bush asked Vice President Dick Cheney to review US energy policy. Cheney is one of many Administration officials, including the President, to have a background in the oil and gas industries. Others include National Security Adviser Condoleeza Rice and two cabinet secretaries. Not surprisingly, in May 2001, Cheney's report concluded that "energy security must be a priority of US trade and foreign policy".

The report set out a global strategy to enhance US national energy security, with detailed recommendations for almost every oil-producing region. The Middle East is forecast to supply between a half and two thirds of the world's oil by 2020. It will "remain vital to US interests" and "will be a primary focus of US international energy policy".

In 2001 Tony Blair also ordered a review of energy policy. The review stated that "the UK will be increasingly dependent on imported oil and gas", and that "increased reliance on imports from Europe and elsewhere underlines the need to integrate our energy concerns into our foreign policy". In January this year, Foreign Secretary Jack Straw outlined the UK's seven strategic priorities for foreign policy to senior staff from Britain's embassies abroad. Bolstering "the security of British and global energy supplies" was number six on the list.

It would be simplistic to describe a new Gulf War as merely "a war about oil". There are many other domestic and international policy considerations involved. But oil and energy security is clearly a prime consideration in US foreign policy. Abject dependence on fossil fuels distorts US policy, prevents it from dealing rationally with countries from Venezuela to Saudi Arabia, and constitutes a major threat to global security and peace.

The need for the world in general and the US in particular to cut dependence on fossil fuels has never been greater. Not the least of the political errors of President Bush has been to review energy policy, and then, like an SUV driver with his eyes closed, put the pedal to the metal and head resolutely in completely the wrong direction. The consequences may be seen in a new war in the Gulf, and in the international conflict and turmoil that would surely follow.

· Duncan McLaren and Ian Willmore work for Friends of the Earth.