from Follow the Money

Oil smuggling is to the Iraqi economy as … exports are to the US economy

June 11, 2006

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The New York Times reported (about a week ago) that oil smuggling now may account for about 10% of Iraq’s GDP.

Iraqi and American officials said they could not offer a total figure for what smuggling is costing the country every year, beyond asserting that it is in the billions.

But Oil Ministry data suggest that the total was $2.5 billion to $4 billion in 2005, said Yahia Said, a research fellow at the London School of Economics and director of the Iraq Revenue Watch at the Open Society Institute, a policy foundation.

Even at the low end, that would mean smuggling costs account for almost 10 percent of Iraq's gross domestic product, $29.3 billion in 2005.

The low end estimate implies that Iraqi oil smuggling – for sale at home and abroad -- is bigger, relative to Iraq’s economy, than US goods exports are relative to the USeconomy.  Oil smuggling is about equal to US exports of both goods and services.   And if the high end estimates are right, oil smuggling is more important to Iraq's economy than exporting -- at least exporting anything other than IOUs -- is to the US economy.

I am not sure what point this drives home harder: that the US doesn't export that much (particularly for an economy with a 7% of GDP current account deficit), or that oil smuggling is really big business in Iraq ...  

One of Toqueville’s core arguments is that big change on the surface doesn’t necessarily change as much as you might think.  Toqueville was thinking of survival of a centralized French state through the revolution.  But the persistence of oil smuggling in Iraq seems like another good case.   The oil smuggling networks got their start back in the days when Iraq was subject to severe international sanctions.  Saddam had lots of oil and no way of getting it out of the country.   So he let (informal) markets do the work, by selling gas cheap in Iraq -- knowing there was money to be made shipping cheap Iraqi gas over various borders.   And it remains a big part of Iraq’s economy.  

The obvious solution would be to stop selling Iraqis gasoline prices that are not just well below US prices, but well below prices in other regional oil producing countries.  However, I guess that kind of shock therapy is too radical for either the US or the Iraqi government to contemplate.  Lots of bad stuff is financed by oil smuggling.  But oil smuggling also must employ a ton of people.

I certainly hope -- but don't expect -- that Zarqawi's end will somehow sets in motion a chain of events that allows Iraq to avoid its ongoing slide into failed state-dom.  Right now, it seems (from afar) that militias -- some linked to oil smuggling gangs, some not; some linked to the security services, some not -- exert de facto control over most of the country.    

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