Crisis Facing Iraq's Oil Industry

This is a partial transcript of "The Big Story With John Gibson," Nov. 30, 2004, that has been edited for clarity.

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JOHN GIBSON, HOST: Terrorists and feuding tribesmen have attacked Iraq's oil pipelines dozens of times since the fall of Saddam Hussein (search). Billions in potential revenue for Iraq's new government has gone up in thick black smoke.

Heather Nauert has more on the crisis facing Iraq's oil industry.

HEATHER NAUERT, FNC CORRESPONDENT: John, according to one report, in just a few months, Iraq has lost $7 billion in revenue because of attacks on the country's oil industry. But the effect is not just economic.

Keith Crane (search), an economist with the Rand Corporation (search) and a former U.S. adviser in Iraq, joins us now from Washington.

And that's the big question, Keith. What is the aim of the sabotage that's taking place against Iraq's oil industry?

KEITH CRANE, ECONOMIST, RAND CORPORATION: It depends upon the group. Iraq has a free market in insurgents. There's lots of different groups. One group, the former Baathists, are intent to making a, the chaos even more chaotic, and they see the blowing up the oil infrastructure as a key way of getting back into power by creating more of a chaotic environment in Iraq.

Other groups are doing it more for business reasons, but they, they're, they have bid on contracts to protect oil pipelines if they lose the contract than by blowing up the pipeline, they make their competitors look bad and...

NAUERT: So sour grapes, then...

CRANE: ... contracts.

NAUERT: ... for those guys.

CRANE: Yes.

NAUERT: OK. Now, are they succeeding? Because it seems, from our vantage point, you've been there, can you share with us whether they are succeeding, or whether sort of all these dramatic pictures that we have of these horrible oil pipeline sabotages are sort of overblown here in the States?

CRANE: I wouldn't say they're overblown. There have been some real severe cutbacks in oil production, especially in April. More recently, at the end of November, we've seen some very sharp declines in output, especially exports. Oil is the, really almost the only source of income for the Iraqi government.

That said, oil production has been rising for the past year, and current lease levels in October were nearing the average levels under Saddam before in the last year of his reign.

NAUERT: But, certainly, if there, the sabotage were not taking place, there could certainly be pumping a lot more oil out of the ground in Iraq. You had mentioned that the goal here is chaos or sabotage. In your view, are they succeeding?

CRANE: Definitely, the situation is very chaotic, and as the key industry in Iraq, Iraqis, as well as the rest of the world, are very sensitive to what's going on in the oil sector. So whenever there's a pipeline break, whenever a refinery has to shut down because of lack of crude, it immediately has a ripple effect through the economy.

So yes, it is very effective psychologically. In terms of government revenue, the Iraqi government has not been spending its — has not been spending what it planned to spend this year for its own bureaucratic — due to its own bureaucratic problems. So for the day-to-day operations of the government, the revenue shortfalls really haven't hit.

NAUERT: OK, just to clarify for folks, what happens to the money? All the money, all the oil that they're pumping out of ground there, where does that actually go? It goes in a fund for the Iraqis. Explain that to us, if you would, please.

CRANE: American oil companies buy oil from Iraq, sell it abroad. Those monies are deposited in an account in the U.S. Fed in New York, and that is, in essence, the treasury of the Iraqi government. The Iraqi government can cut checks on that and buy food or supplies or pay people in Iraq, whatever they need to do.

NAUERT: So to the extent that these pipelines are being disrupted, it ultimately ends up hurting the Iraqi people the most, because Iraqis won't be able to pay their teachers, build their hospitals, or whatnot. Is that correct?

CRANE: Yes. In the medium term, right at this point in time, there's plenty of cash in the account. As I mentioned before, the finance ministry in Iraq has had real difficulties in getting its act together to spend the funds that have been appropriated this year, so it's not like anybody's missing a paycheck.

NAUERT: But ultimately, in the long term, as I understand it, if these attacks continue, there are going to be teachers in Iraq who are not going to be paid because of these people, whether they be foreign fighters or whether they be Baathists who are upset that they're not in power anymore, it's going to end up hurting the Iraqi people the most.

CRANE: Yes, I think it's not so much on the day-to-day operations of government, it's more for the reconstruction effort. Another 12 months or so, the U.S. funds are going to be petering out, and the Iraqis will have to pay for their own reconstruction. And at that point in time, any disruption in terms of government revenues really will have an impact on their ability to build power stations, to repair roads, and to get the economy going again.

NAUERT: All right. Keith Crane from the Rand Corporation, thanks so much. And hopefully they can find a way to get a handle on this. Appreciate your time. Thanks.

CRANE: Sure, thank you.

NAUERT: John?

GIBSON: OK, Heather, thank you.

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