Why it’s good news for the U.S. that China is snapping up Iraq’s oil

June 3, 2013

An engineer walks across the Zubair oil field in southern Iraq. (ESSAM -AL-SUDANI/AFP/Getty Images)

If you thought that the U.S.-led Iraq War would at least open up the country's vast oil reserves to American firms, perhaps defraying some of the war's enormous costs, then the New York Times has some bad news for you: Iraqi oil is increasingly flowing east, to China.

"China already buys nearly half the oil that Iraq produces, nearly 1.5 million barrels a day, and is angling for an even bigger share, bidding for a stake now owned by Exxon Mobil in one of Iraq’s largest oil fields," the Times's Tim Arango Clifford Krauss report. A former Pentagon official who worked on Iraqi oil policy during the Bush administration told the reporters, "We lost out. The Chinese had nothing to do with the war, but from an economic standpoint they are benefiting from it." The implicit message is that Iraqi oil was supposed to be our spoils of war, but they're getting scooped up by China instead.

On Twitter, the Atlantic's James Fallows summed up the general reaction to China's growing interest in Iraqi oil, writing, "Would be crude & reductionist to say U.S. fought Iraq, and China won. But wouldn't be wrong."

Fair enough. And it's true that the Iraq War came nowhere close to paying for itself, as former Defense Secretary Donald Rumsfeld and others suggested it would. And that's just considering the cost in dollars, much less American and Iraqi lives, U.S. credibility abroad and in the middle east particularly. So, even if the Iraqi oil did end up going mostly to U.S. rather than Chinese firms, that would not even remotely outweigh the dollar-costs of the war.

But, looking in isolation just at the growing Chinese stake in Iraqi oil and putting aside for a moment the symbolic power of that trend, it's worth remembering that the global energy supply is not exactly a zero-sum game. And things that help China don't necessarily hurt the U.S. Despite the broader narrative of a post-war Iraq that's far from a reliable American ally (which is true), there are some real silver linings for the U.S. to this story. Here are a few:

(1) Reduces Chinese competition for oil in other countries.

One reason Chinese firms are outperforming Western firms in Iraq is that Baghdad has tight restrictions on drilling rights that reduce the firm's profit. That makes it less attractive for American or British firms, who would rather drill in places where they can enjoy higher margins. But Chinese firms are just after energy, not profit, so they don't mind it as much. That's good both for China and, believe it or not, for the U.S., because it reduces Chinese demand in more U.S.-friendly markets. In other words, the more oil that China buys in Iraq, the less it will want to buy in, say, Angola, which means that U.S. firms can get it cheaper there than they otherwise would. That's better for everybody.

(2) China is paying for Iraq's infrastructure development, which benefits us.

A big reason that the Iraq War never ended up "paying for itself," other than the rapidly escalating costs, is the fact that the oil sector had been badly degraded by years of sanctions and mismanagement. It was always going to be a huge, costly, long-term project to get it up to fuller production. The New York Times story says it takes $30 billion in annual investment; neither the U.S. nor Exxon Mobil was likely to foot that bill. But China is just oil-hungry enough to do it. Those investments will pay off for generations, increasing the global energy supply and alleviating upward pressure on prices. That's good for everyone who buys oil on the global market, including the U.S.

(3) Reduces China's reliance on Iran.

As China diversifies its energy imports, buying more and more form Iraq, it will need Iranian oil less and less. International sanctions on Iran, potential political instability and fears of war all make Iran an increasingly unattractive source of oil for China. This makes Beijing more likely to enforce sanctions against Iran, which – hopefully – will in turn pressure Tehran to finally compromise on its nuclear program.

(4) Forces China to care more about peace and stability in the Middle East.

As I've written before, China's increasing investment in foreign markets is actually great news for the U.S., which is finding it harder and harder to be the world's policeman. Although this sometimes gets portrayed as scary resource competition, it's also forcing China to act less like a free-rider on a U.S.-enforced international system and more like a responsible stakeholder in global peace and stability. Iraq in particular badly needs outside aid and attention to keep its political system and economy together. The more money and interest China has tied up a stable Iraq, the harder it will work to keep it that way – something that very much benefits the U.S.

(5) Protects global energy market from China-driven price spikes.

China is the world's biggest oil importer and its demanding is only going up. That puts upward pressure on prices, making American imports more expensive as well. China is very reliant on a small number of oil exporters. If one of those exporters went offline – let's say, for example, that protests in Sudan spiral out of control and political instability cuts exports – then China still needs to import oil, so it would just start paying more. That kind of demand spike could raise prices for everyone, including the U.S. Diversified Chinese imports reduces the odds of that happening and the severity if it did.

To be clear, none of this is to say that the Iraq War is proving to be anywhere near balance positive for the U.S. economy. But it's worth keeping in mind that the global energy market is just that – a global market – and that the U.S. and China have mutual interests in keeping it running.

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Max Fisher · June 3, 2013