The New York Times report that China purchases nearly half of Iraq’s oil exports set off something of a firestorm in the U.S this week. In fact, outrage over the NYT’s article offered a rare point of bipartisan consensus in the U.S.
Thus, billionaire businessman-turned-outrageous-right-wing-pundit, Donald Trump, took to Fox News to complain, “We spend $1.5 trillion, we lose thousands of lives, we destroy a country … but China is in there taking out all the oil, and we’re getting nothing…. I’ve said it a thousand times … we shouldn’t have been there, but if we’re there, take the oil. Take the oil…. Well guess what? China is taking the oil, but they didn’t have to fight.”
In a more humorous way, liberal comedian John Stewart, host of the popular-in-China Daily Show with John Stewart, wondered if there wasn’t some rule that required the biggest victor in a war to have actually fought in it.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
“It’s not fair,” Stewart said. “China gets all that sweet, sweet, sweet oil. That’s our oil.”
These and similar comments illustrate the profound misconception surrounding how global energy markets operate in modern world. Once this misconception is corrected, it becomes clear that the U.S. more than any other country besides Iraq should be praising China for its energy operations in the Persian Gulf state.
Overwhelming public discourse depicts global energy markets as operating according to Mercantilist economic logic, whereby consumer nations compete intensely to own the oil resources in producer nations as many of today’s consumer countries once owned the resources of their colonies.
But this misconstrues how global energy markets actually operate. Although China itself does actually seek to own some of partner nations’ oil resources, these deviations are not enough to change the fact that global oil markets operate according to the free-market principles of supply and demand. Therefore, a net increase in the global supplies of oil, no matter where it is exported, will result in a lower price of oil everywhere (all things being equal).
Thus, even if China was purchasing all of Iraq’s oil this would still benefit the U.S. and its allies because they could purchase oil elsewhere at a lower cost. By contrast, if China wasn’t purchasing Iraqi oil it would be purchasing oil from these other producing nations. If, in this latter scenario, Iraq wasn’t producing or exporting the oil it had been to China in the first one, every importing nation would be paying a higher price for their supplies.
The misconception over how oil markets operate has been at the heart of the U.S. anti-Iraq war campaign from the outset. In particular, it was seen in the “no more blood for oil” bumper stickers that every American anti-war advocate proudly displayed on their SUVs or other automobiles without the slightest sense of irony.
To be sure, the Iraq War was a strategic blunder of epic proportions for the United States for a multitude of reasons. The popular notion that the U.S. was only invading Iraq for its oil resources was not among these reasons. After all, if all the U.S. wanted was Iraqi oil all it had to do was ask the UN to remove the sanctions against Iraq exporting oil during the 1990s. Saddam Hussein would have gladly sold Iraq’s oil given the revenues this would entail for his regime. It was the U.S. by leading the charge to maintain the sanctions that was preventing almost all of Iraq’s oil from reaching global markets.
Those now raising criticisms over the Iraq War because China is “winning” more of Iraq’s oil than the U.S. are equally misguided. To begin with, China isn’t winning Iraqi oil so much as the U.S. and Western oil companies have conceded it. This is because the U.S., some American lawmakers and pundits claims notwithstanding, bungled the Iraqi invasion and occupation from start to finish. Although the Iraq surge did improve the security situation enough to allow the U.S. to get out of the country, it failed to solve any of the political problems causing the Iraqi sectarian war in the first place.
As such, Iraq’s future stability has always been an open question at best. Political tensions between and within Iraq’s different ethnic and sectarian groups have intensified since the U.S. withdrawal, and violence is now at a level not seen in many years. In this context, most Western oil companies have been pulling out of southern Iraq deeming it too risky to make the needed investments in Iraq’s oil infrastructure given the uncertain returns.
Fortunately, as is true across the globe, Chinese oil companies are far less risk-adverse than Western oil companies and, therefore, are seeking to fill the vacuum being left by the West’s departure.
This is entirely to the United States and its allies benefit. Were Chinese companies not so interested in Iraqi oil, it is almost certain that the huge potential of the Iraqi oil industry would continue to go unrealized. In that case, there would be less oil available on the open market and global oil prices would be a lot steeper. In fact, were it not for China’s involvement in Iraq the West wouldn’t have been able to enact sanctions on Iran’s oil exports without causing severe disruptions in the global economy.
Furthermore, while Iraq’s future hardly looks bright, it would be in far worse shape were it not for its rising oil revenues. Without China’s continued involvement, these oil revenues would by and large not exist. It’s by no means certain that Iraq will end up stable over the long term; if it does, however, China’s willingness to continue building up its oil industry will have played an important role.
Notably, although China opposed the U.S. invasion, it is now the country assuming all the risk in its future by investing heavily in its oil industry. If the political order in Iraq breaks down, many will blame the U.S. for having invaded in the first place. It will be the Chinese (largely state-owned) companies whose balance sheets are the most affected, however.