The Idiot's Guide to Drinking Your Milkshake*

Sometimes its appropriate to give the devil his due. The recently announced oil contracts in Iraq are indeed such an occasion.

Now, without saying whether I personally believe this to be true or not, one need not don a tinfoil hat to speculate that the Iraq war was entered into partially or wholly on the basis of securing U.S. access to oil in that country. I would regard this as legitimate suspicion rather than pure conspiracy theory; certainly, the litany of news since 2003 detailing the way in which the Bush administration deliberately mis-characterized the case for going to war would provide ample support.

What would be in error would be to suggest that heavy U.S. involvement in advising the Iraqi government on the new oil contracts or that the oil contracts were awarded to the oil companies who previously held exclusive rights to the Iraqi oil fields conclusively demonstrates that indeed such a conspiracy existed. There are legitimate reasons why such circumstances would occur absent Dick Cheney's malignant and abandoned heart.

The business of oil is a far greater undertaking than merely digging some holes and pumping out black gold. For the most easily accessible oil fields, that's basically the case, and so the Jed Clampett scenario is somewhat plausible. It was certainly the case during the early years of U.S. oil drilling. However, examining the history of domestic U.S. oil production, its also fairly obvious that it proceeded in a manner that involved a great deal of waste. In oil production, efficiency is key. Failure to abide by this dictum can spoil an otherwise profitable well and make it prohibitably expensive to pump out the remaining crude. Specialized knowledge on procedures can make a huge difference. The massive inefficiencies of the nationalized Iraqi oil industry under Saddam Hussein's regime make this obvious.

Proper technique is not the only key. Oil production also requires a great deal of specialized knowledge on the specific geological conditions of a well; not all oil wells are the same. Failure to recognzie this fact, and conduct the proper surveys, will also spoil an otherwise profitable well. If Chevron et al are to be re-awarded the Iraqi contracts, the best basis to do so would be their prior knowledge of the specific conditions in question.

Finally, the huge variance in the clauses in an oil contract can have a huge impact on profit. While at the present point in history, there is only one basic type of oil contract, there are also a nearly infinite number of possibilities that arise from how that contract is structured. The specialized knowledge in this area can have as great an effect as either of the other two areas. Arbitration clauses, royalties, profit structuring and technology-sharing agreements will all produce a wide variance in how much money the Iraqi government will receive from these contracts. While I have not seen the contracts in question, nor do I believe they are at the moment publicly available in any form, I think it would be in error to assume that simply because the U.S. military conducted the war and also advised the government on the contracts that there is some sort of causal connection. Even in the absence of such a connection, for decades, the Iraqi oil industry has operated a nationalized industry and they have scant experience in structuring such contracts in a private market. I refuse to jump to the conclusion that the terms of the contracts were simply dictated to the Iraqi government; they absolutely needed some outside guidance. Whether the U.S. military was the best source of this advice is another matter, but is not determinative of the ultimate issue here.

In short, while its reasonable to be suspicion of what is occurring in the Iraqi oil industry, it does not prove a grand conspiracy. If such a conspiracy exists, in the coming years the public will not need to rely on this circumstantial evidence. I'm sure Rep. Henry Waxman is planning to launch an investigation into the matter the day after President Obama is inaugurated.

* I do not mean to be condescending with either the title or the contents of this post. If, in my analysis, I have omitted certain information or simply stated something as true without explaining it it's mostly because it involves a highly technical explanation or a long history. If you have doubts regarding any of my conclusions or statements of fact, feel free to leave a comment or email me & I'll point you towards my source information. Most of the knowledge I represent here comes from having studied international oil and gas law and I am open to being corrected if I am in error.