From Tulips to Bitcoins

Crude Oil: No Blood for Oil?

1990

Power politics in the Middle East: Kuwait is invaded by Iraq, but Iraq faces a coalition of Western countries led by the United States and has to back down. In retreat, Iraqi troops set the Kuwaiti oil fields on fire. Within three months the price of oil more than doubles, from below 20 to more than 40 USD.

“Once [Saddam Hussein] acquired Kuwait . . . he was clearly in a position to be able to dictate the future of worldwide energy policy, and that gave him a stranglehold on our economy and on that of most of the other nations of the world as well.”

During the Iran-Iraq War of the 1980s, Iraq had enjoyed good relations with the United States and Europe. The Western countries supported Iraq, especially militarily, in order to counteract the Khomeini regime in Tehran and the further spread of Islamic and Soviet influence.

In 1980 Iraq was producing about six million barrels of crude oil per day, and Iran about five million barrels, most of which came from the oil-rich southwestern province of Khuzestan. Combined, crude oil production in the two countries accounted for about 20 percent of the world’s daily consumption. But the eight-year war, which killed a million people on both sides, greatly affected the economy of Iraq, whose main funding came from the Arab states, in particular Saudi Arabia and Kuwait. After the war, the country was heavily in debt to them.

In addition, Iraq had always denied the legitimacy of Kuwait’s independence, considering it part of Iraqi territory. Conflicts had been smoldering around the border since its independence from the United Kingdom in 1961. Meanwhile Iraq was working to cancel or renegotiate its debt burden with Saudi Arabia and Kuwait and also trying to lower its debt by reducing crude oil production (thus leading to higher prices and higher profits). But Kuwait counteracted that move by increasing its quota and lowering its export price to increase its own market share.

On July 17, 1990, Iraq accused its neighbors and the United Arab Emirates of producing far more oil than was agreed within OPEC, thereby pushing prices down and resulting in losses of 14 billion USD to Iraq alone. Iraq also accused its neighbors of stealing oil from Iraqi oil fields along their common border.

A Quick Primer to Three Persian Gulf Wars

The Iran-Iraq War (1980–1988) was originally referred to as the Gulf War until the Persian Gulf War of 1990–1991 (the Iraq-Kuwait conflict), after which the latter was known as the First Gulf War. Consequently, the Iraq War of 2003–2011 has been called the Second Gulf War.

In September 1980 Iraq, headed by Saddam Hussein, invaded Iran, triggering an eight-year war that destabilized the region and devastated both countries. The United States supported Iraq during that war, because America was nervous about the potential spread of the Islamic Iranian Revolution by Ayatollah Khomeini, and Iraq longed to replace Iran as the dominant Persian Gulf state.

The Gulf War of 1990 was waged by coalition forces from 35 nations led by the United States against Iraq, still headed by Saddam Hussein, in response to Iraq’s invasion and annexation of Kuwait. By that annexation, Iraq doubled its known oil reserves to 20 percent of global reserves, and was threatening Saudi Arabia, which controlled another 25 percent of global crude oil reserves, a situation that the United States could not tolerate.

But it took another Gulf War to overthrow the government of Saddam Hussein. In 2003 a United States–led coalition invaded Iraq on the pretext that Iraq had weapons of mass destruction.

Today Iran and Saudi Arabia are fighting for regional hegemony in a renewed cold war that is also an Islamic conflict of Sunni against Shiite. The Sunni-Shia conflict has been 1,400 years in the making. The arguments are complicated but essentially boil down to who is the rightful leader of Muslims following the prophet Mohammed after his death. With as much as 90 percent, the majority of the world’s Muslims are Sunni. Iran, Iraq, Azerbaijan, and Bahrain, however, have a majority Shia population.

Figure 9. Crude oil prices, 1989–1991, in USD/barrel. Data: Bloomberg, 2019.

Together, Iraq and Kuwait accounted for about 20 percent of the world’s oil reserves.

Strategically, Kuwait was extremely valuable to Iraq. Although it is only 20,000 square kilometers, Kuwait has a 500-kilometer coastline, far exceeding the 60-kilometer coastline of much larger Iraq, whose area is almost 450,000 square kilometers. During the invasion, Iraq captured gold worth more than 500 million USD and, more importantly, gained access to Kuwaiti oil resources.

Saddam Hussein had counted on the United States not to interfere in internal Arab affairs, but he now faced a completely different reaction from President George H. W. Bush. It seemed that US interests not only concerned Kuwaiti oil fields; they touched indirectly on Iraqi oil fields as well. Iraq controlled 10 percent of the world’s oil reserves; the annexation of Kuwait added another 10 percent.

Moreover, as US Secretary of Defense (and later CEO of Halliburton, a major oil company) Richard “Dick” Cheney noted a few weeks after the Iraqi invasion, “Iraqi troops are only a few hundred kilometers away from another 25 percent of the world’s oil reserves in eastern Saudi Arabia.”

Just a few hours after the beginning of the invasion, the UN Security Council adopted Resolution 660, which called for the withdrawal of the Iraqi troops. Within a week, the Security Council had imposed an economic and financial ban against Iraq (Resolution 661), which was designed to put an end to Iraqi crude oil exports. Meanwhile, the United States formed a military alliance of 34 countries against Iraq under the leadership of General Norman Schwarzkopf. Of the more than 900,000 soldiers deployed, about 75 percent were American troops. On August 8, two US Navy aircraft carriers arrived in the region, and President Bush initiated Operation Desert Shield to protect Saudi Arabia from an invasion.

By Resolution 662, the UN Security Council declared the annexation of Kuwait by Iraq void and called for the restoration of its sovereignty. On August 25, the UN Security Council sanctioned the coalition’s embargo under Operation Desert Shield. By then 70 warships were deployed in the Gulf region.

In occupied Kuwait arrests, abductions, torture, and executions were the order of the day, and the Iraqi government used foreign hostages as human shields. On September 5 Saddam Hussein invoked holy war against the United States in the Persian Gulf and called for the fall of the Saudi Arabian king Fahd. The Kuwaiti royal family had already fled.

On November 29 the UN Security Council presented Iraq with an ultimatum for withdrawal from Kuwait by January 15, 1991. The US Congress approved military measures on January 12, and five days later, in the early morning hours, coalition forces began a massive air strike against Iraq. Within the first 24 hours of Operation Desert Storm, there were approximately 1,300 attacks.

It took another Gulf War, in 2003, to overthrow the regime of Saddam Hussein.

Despite the war, American and British aims to eliminate the military power of Iraq, and its claims to supremacy in the region, remained unfulfilled. It took another Gulf War in 2003 to overthrow the regime of Saddam Hussein.

Key Takeaways

•The president of Iraq, Saddam Hussein, aspired to hegemony in the Middle East, the most oil-rich region of the world, but he failed to overthrow Iran during eight years of war in the 1980s.

•Kuwait, despite its small geographic size, was of strategic importance to Iraq, because of its oil resources and its coastal access and harbor.

•The Gulf War of 1990–1991 began with the invasion of Kuwait by Iraq and ended because of the intervention of the United States with Operations Desert Shield and Desert Storm. As a consequence of supply insecurity and burning oil fields, oil prices shot up from 15 USD to more than 40 USD.