Falling Oil Prices Could Hinder Iraq’s Reconstruction

Last week, we posted an article here that examined the negative effects falling oil prices would have on anti-American regimes in three countries: Iran, Venezuela, and Russia.  The post described how lower oil prices would adversely effect those nations’ economies, reducing their influence on the world stage–a good thing for the US.  As it turns out, falling oil prices could have similarly negative effects on the economy of Iraq (which can be called an American ally or American responsibility, depending on your point of view)–a bad thing for the US.

On Saturday, Iraqi Finance Minister Bayan Jabr announced that his government had cut its 2009 budget by 16% in response to plummeting prices for crude on the world market, according to the Wall Street Journal.  The Iraqi government depends on oil revenues for 90% of its total income.  Now that the price of crude has fallen to half of what it was this summer, the government has had to adjust its economic plans accordingly.

So why is a smaller Iraqi budget a bad thing for our country?  Because American taxpayers will most likely have to pick up the tab for whatever the Iraqi government can’t pay for.  Although record-high oil prices this year helped bestow a budget surplus of around $45 billion on Iraq (source: US Government Accountability Office), the money is simply not getting things done.  In an Associated Press article, Jabr is quoted as saying that $400 billion is needed to complete the rebuilding Iraq’s devastated infrastructure and to get its sputtering economy up and running.  So far, plans to begin large-scale reconstruction have been slow to start, to say the least.  “Out of 23.2 billion dollars for the reconstruction of Iraq’s security, oil, electricity and water sectors, the nation has spent only 3.9 billion dollars in three years from 2005,” explained an article on AFP.com.  Violence, a disorganized bureaucracy , and a serious lack of manpower have all conspired to make the Iraqi government a wealthy but highly ineffective entity since the US invasion in 2003.  To its credit, the Iraqi government is certainly putting forth the effort to get reconstruction moving–$15 billion of its 2009 budget is marked for reconstruction projects, as reported by the Associated Press.

As its sizable surplus shrinks and future income dwindles along with global oil prices, Iraq will no doubt turn to the US for required funding and other resources make measurable progress in the task of rebuilding itself.  Faced with an impending recession and huge budget deficits, continuing to spend billions of dollars a month in Iraq could only make America’s financial problems worse.

And so we see yet another effect of the falling price of oil.  If oil prices continue on their steep downward trajectory, we will no doubt discover more shifts in international economics and politics; some positive and some negative.