Any Thoughts On the Value of the Iraqi Oil Industry

[adios]

I'm working up a post on the valuation of the Iraqi oil industry and I'm curious what other posters thoughts are if any. I think it's a critical question for many reasons. How rich is Iraq really i.e. how much can state run oil industry really impact the standard of living in Iraq? If one solution is to give each Iraqi an equal share of the industry, how much does this really increase the wealth of an average Iraqi? How much debt can Iraq service in the long run? How big of a bottom line impact will getting Iraq's oil industry to the point where it can meet it's OPEC production quotas be? I've got an approximate figure that I came up with and it's rather surprising at least to me as to the value of the industry. I'm just wondering if I'm not considering something that I should although it seems to be at least in the ball park when I compare Iraq and Saudi Arabia.

[IrishHand]

how much does this really increase the wealth of an average Iraqi?
How much does the oil industry in Saudi Arabia increase the wealth of the average Saudi? (And by average in this context, we're talking about mode or median, not mean - unless you want to say that the average IrishHand/BillGates is a billionaire.)

[Chris Alger]

[Cyrus]

- Data about Iraq's oil fields can be easily found, eg http://www.bp.com/centres/energy2002/oil/reserves.asp

- One should base his estimates on the basis of buying out that country as if it was an oil producing piece of land and nothing more. Projections of oil price into the future, level & cost of production, NPV, come into play.

- One should not only calculate GDP per capita as this is a misleading statistic. Arithmetic averages tend to ignore dispersion. A truer measure of wealth dispersion is the disparity between highest and lowest strata of society.

Good hunting.

[adios]

Chris do you have a link. I did a search on Google and I came up with NADA. It would be much appreciated if you had one.

[Chris Alger]

Actually, I misread your post and thought it said "any thoughts on the name for the Iraqi oil industry." I was making a dumb joke. Think acronym.

[adios]

"- One should base his estimates on the basis of buying out that country as if it was an oil producing piece of land and nothing more. Projections of oil price into the future, level & cost of production, NPV, come into play."

Basically the approach I used. I might add that as the price of oil increases, other alternatives to crude come into play.

"One should not only calculate GDP per capita as this is a misleading statistic. Arithmetic averages tend to ignore dispersion. A truer measure of wealth dispersion is the disparity between highest and lowest strata of society."

Ok I agree but if I used per capita GDP and it gives me a number that is biased on the high side i.e. portrays a scenario that shows the average person is better off than the actually are, that will tell me something if that number is low. For instance per capita GDP in Saudi Arabia probably shows that the average person is better off than they really are. By the way Saudi Arabia does not have the highest per capita GDP in the Arab world, it's not even close to being the highest.

[Chris Alger]

I have no idea, but I'm sure plenty of economists have put a price tag on it. I understand that the oil resources remain extremely underdeveloped and that production costs are as low as $2.50 a barrel. With the world's second largest known reserves this should mean immense potential wealth for all 23 million Iraqis. But whether and to what extent the value of the oil has any effect at all on ordinrary people will mostly be a function of how the country's political economy distributes the wealth.

I would also distinguish the value of oil revenue from the economic effects on the flow of that revenue. It makes a difference to a lot of actors what portions of it go to popular domestic needs, elite domestic needs, and investments in foreign assets. I would also distinguish economic value as determined by oil price from the strategic value of controlling the oil which in turn has significant economic advantages.

[brad]

think imf/world bank.

remember argentina.

from what ive heard the US is letting UN hold oil in 'trust' for iraqi people.

of course iraq will need money. thats where imf comes in with loans (guaranteed by oil).

hey it worked in argentina itll work here.

[adios]

"I have no idea, but I'm sure plenty of economists have put a price tag on it."

Can't find anyone who has Chris but I would sure like to. The solution is actually involves economics and finance but it shouldn't be that complicated and I actually agree with Cyrus's comments about how to value it. So the in the ground estimates are fairly well known so I've come up with a tentative, ball park number.

"I understand that the oil resources remain extremely underdeveloped and that production costs are as low as $2.50 a barrel."

This is the problem I'm having. I'm not sure what the bottom line is in profits and I really need a source. I've got a couple tentative ones where I can discern a value based on comments but nothing concrete. BTW they don't seem to indicate those kind of profit margins, however, the number $2.50 a barrel does ring a bell. Again though I'd like a source because it does make a big difference.

" With the world's second largest known reserves this should mean immense potential wealth for all 23 million Iraqis."

Yep this is the impact I'm trying to estimate.

"But whether and to what extent the value of the oil has any effect at all on ordinrary people will mostly be a function of how the country's political economy distributes the wealth."

Agreed. I've more or less implied a possible solution of giving each Iraqi citizen an equal share of the industry through privitization (Iraqis are the owners) and allowing that entity to trade on the open market and have the private company pay a dividend to each share of stock thus paying Iraqis directly. In that way Iraqis can sell the portions to raise capital for whatever reason they want or retain it all or whatever. I'm certainly willing to listen to others.

"I would also distinguish the value of oil revenue from the economic effects on the flow of that revenue. It makes a difference to a lot of actors what portions of it go to popular domestic needs, elite domestic needs, and investments in foreign assets. I would also distinguish economic value as determined by oil price from the strategic value of controlling the oil which in turn has significant economic advantages."

I'm not clear on exactly what you mean here so I wouldn't have an idea on quantifying them. In terms of supply and demand, I would think that the OPEC quotas provide for optimal price points in a microeconomic sense. I don't really know though because I haven't studied the various aspects of oil pricing and the dynamics of the industry to the degree I would like. I'm getting on board though.

[adios]

Doing further review tonight I find that Iraq has very low oil production costs that are in line with Saudi Arabia's productions costs. From the best I can determine Saudi production costs are anywhere from $2.50 a barrel to $5.00 a barrel. That's good as it will put some bounds on the valuation. Here's the kicker about Iraq, apparently they have huge natural gas reserves as well as a lot of unexplored areas for oil and natural gas. Iraq is most often quoted with 112 billion barrels of oil with potentially 100 billion more in unexplored regions. I'm not sure what state the Iraqi natural gas industry is in.

[Cyrus]

"As the price of oil increases, other alternatives to crude come into play."

Careful with those oil price projections into the future! I mean, if you can accurately estimate the price of crude a year from now, within a $3 range, I have a job for you. (On second thought, forget about the job. I wanna be your agent!)

"Per capita GDP in Saudi Arabia probably shows that the average person is better off than they really are."

Yes, exactly. And for a look closer to home, take a look at the link, if you can. The GINI index is the one to watch.

Boom for whom? (http://www.panix.com/~dhenwood/IncPov98.html)

[brad]

'Agreed. I've more or less implied a possible solution of giving each Iraqi citizen an equal share of the industry through privitization (Iraqis are the owners) and allowing that entity to trade on the open market and have the private company pay a dividend to each share of stock thus paying Iraqis directly. In that way Iraqis can sell the portions to raise capital for whatever reason they want or retain it all or whatever. I'm certainly willing to listen to others.'

its already been announced the UN will hold the oil in trust for the iraqi people and that the imf will be generous with loans.

[adios]

This has been discussed previously somewhat. It needs a separate thread. Stock market overall since 1998 is in the toilet especially NASDAQ.

[Ray Zee]

see how iraq's oil reseves compares to saudi arabia's. then adjust for the population difference. the iraq people would be better or worse off accordingly.

we have to assume that the people in iraq will get about what the people in S.A. get per person.

i would think the people would be filty rich. but countries find ways to never let the populace prosper too much as it takes away power from the officals.

[adios]

I agree that the Saudi's are a good benchmark in that from what I've gathered so far, the cost of crude oil production is basically the same for each country and quite low. Also the Saudi's have apparently developed their natural gas industry as they have abundant natural gas resouces. Iraq does too but has not developed their natural gas industry yet. Also the population of each country are fairly close to each other in size. The Saudi's oil and gas industries are nationalized. Saudi per capita GDP is quite low on an absolute basis and not that high when compared to other countries in the region. For instance Kuwait has about twice the per-capita GDP that Saudi Arabia has. I know that the Saudi's do not have an economy that places an emphasis on free and open markets rather they have a planned economy. I'm not sure about the personal distribution of income in Saudi Arabia but I'm fairly certain that there are lot's of have nots and a few have's that are quite wealthy. Also the Saudi's apparently have a great deal of production capacity that they use a fraction of while the Iraqi oil fields are basically in a state of disrepair where they don't have the capacity to even meet their OPEC production quotas. What Iraq should do to maximize their profits over the long haul is do what the Saudi's have done i.e. develop a great deal of capacity.

[adios]

The Iraqis will no doubt need capital to build their economy. Right now they have a mountain of debt that was incurred by the Hussein regime. This kind of debt has crippled other third world countries for many years (sorry but that's basically the state of the Iraqi economy now i.e. third world) but not many countries have the untapped wealth that Iraq has either. Personally I don't think the new Iraqi government has an obligation to repay these debts.

[Cyrus]

"I know that the Saudi's do not have an economy that places an emphasis on free and open markets rather they have a planned economy. I'm not sure about the personal distribution of income in Saudi Arabia but I'm fairly certain that there are lot's of have nots and a few have's that are quite wealthy."

Briefly, there's no "free market" anywhere in the Arab world, in the sense that we understand "free market" in the western democracies.

Saudi Arabia's administrative bureaucracy is staffed in almost all key positions with various lowly offsprings and relatives of the main ruling Saud family. Quite a large number of Saudis, for instance, carry the title of Prince.

The Saudi Arabia citizen pays practically no taxes and enjoys free education and medical coverage. Most of the people work in government or public sector entities. There's a significant number of Saudi entrepreneurs, in the sense of the middle man, rather than the creator of business. A lot of consultants and lobbyists, as well.

The infrastructure in Saudi Arabia (roads, buildings, factories, city zoning, etc) are quite advanced and up to European standards.

The main problem today in Saudi Arabia is the religious opposition from the clerics who disagree with the presence of American soldiers near the "holy grounds" of Mecca and Medina. To them it's the equivalent of having a group of nudists next to Holy Mass in a Christian church. It is estimated that approximately nine out of ten Saudis want the Americans out. The figure is even higher amongst the immigrant population (mostly Muslims from countries such as Indonesia, Philippines, Iraq, etc).

[brad]

'Personally I don't think the new Iraqi government has an obligation to repay these debts. '

one sharp radio host talked about how democracy is needed in iraq precisely in order for the people to be able to 'contract away' their oil rights.

his analogy was the US giving away the panama canal and his argument was pretty sharp really. (other than the fact that its in panama in mean come on our representatives give away US property which i guess in principle belongs to all US people (say like national park or something) and US people cant do a thing about it because our reps did it and they acted for us with our consent, whereas if some US dicatator gave away (say a national park), then u see where people could make an argument that they want it back. etc.etc.

[Jimbo]

Great post Brad, this is what we need to see more of from you. /forums/images/icons/smile.gif You really can be a smart cookie when you try! /forums/images/icons/smile.gif