Ongoing Electricity Shortage Costs Iraq Economy $40 Billion a Year

Iraq has chronically struggled to provide consistent electricity services to its citizens, despite its enormous potential as an energy-producing country.

al-monitor An electrician walks past wires connected to a local generator in Baghdad, Jan. 23, 2011. Photo by REUTERS/Saad Shalash.

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Sep 24, 2013

On Sept. 14, 2013, the Iraqi parliament's Oil and Energy Committee published a report drafted by the advisory board of the Prime Minister's Office, which indicated that Iraq is losing around $40 billion annually due to the lingering power outage crisis. The report confirmed that the continuous power outages caused serious damage to petrochemical plants and private plants. It is worth mentioning that for years now power outages in Iraq have shot up from 15 to 20 hours per day throughout the year, with the exception of the Kurdistan Region of Iraq, where the private sector participates in electricity generation and distribution.

It is true that power outages have become a part of daily life for Iraqi citizens, but their far-reaching implications go beyond significant material losses. The continuous blackout has led to the use of generators at homes and in neighborhoods, causing severe environmental pollution. Moreover, constant and sudden outages damage household electrical appliances such as refrigerators, computers and televisions. These losses may have been borne by the citizen and not the state as a whole, yet they are significant cumulatively losses for the country, both at the moral and material levels. Besides pollution, Iraqis pay hundreds of dollars for generators and fuel, in addition to the state electricity bills.

Why this dire situation in the electricity sector in Iraq and other Arab countries? Why is this happening at this particular stage and not in the first stages of use of electricity in the Middle East, that is, decades ago, after World War II? Does Iraq — and other countries witnessing the same tragic experience — lack the necessary funds for the construction of power plants? Of course not. The main reason lies in the dissemination of a culture of corruption and lack of accountability, which spread to senior officials in the Iraqi state.

In Iraq, delays are caused by contracts held by inexperienced companies that are locally executed by non-specialized government officials. Meanwhile, there should be an integrated project or plan that takes into account the increase in annual power consumption rates, the most economical fuel to be used depending on the availability in the concerned state, the possibility of using solar and wind power alternatives to supply additional power and the possibility of electrical interconnection with neighboring countries. This is the case in the region under the initiative of the Arab Fund for Economic and Social Development (AFESD). Other considerations include environmental impacts of alternatives, the possibility of cooperation with the private sector to invest in the electricity generation sector — provided that bidding companies are not owned by relatives and friends of officials and enjoy the necessary experience — and the study of pricing which helps rationalizing electrical energy consumptions without harming the poor classes.

This is not new; there are several global studies in this field. The electricity crisis is but one of numerous crises hitting the energy sector of Iraq. Others include the emergence of two different oil industries in the country since 2003, one in the federal state and the other in the Kurdistan Region of Iraq. The disputes between these two industries are being exacerbated and are likely to get worse soon in terms of oil and politics, should the Kurdistan Region of Iraq start exporting oil directly to Turkey without the Iraqi federal government’s consent, which would be an express violation of the constitution.

On a different note, the ambitious plan to produce 12.5 million barrels of oil per day by 2017 faces numerous obstacles, as predicted by many Iraqi oil experts. The question is: Why is there this rush to produce that much oil in such a short time? It is well-known that Iraq’s huge oil reserves placed it among the top five countries in the world in proven reserves. Thus, it is crucial for Iraq to develop the discovered fields and promote exploration programs to find new fields. Yet, the country has witnessed delays in this respect over the past few decades due to wars and the international embargo. It is well-known by now that promoting this oil plan — which is difficult to achieve in a very short time — underlies an attempt to provide the general budget with the highest oil income possible so as to fulfill short-sighted political commitments. These include the employment of the largest number possible of civil servants — whether they are necessary or not — and saving necessary money for officials to buy people’s loyalty.

The collapse of oil prices at the end of the last decade was a matter of concern for state officials who feared a huge deficit in the general budget. This would cut the amount of funds placed at their disposal without supervision or accountability. Therefore, more pressure was exerted on oil authorities to increase production so as to compensate for any potential budget deficit. It is in light of these facts that agreements were concluded with international oil companies to develop Iraq's oil fields.

This is not a criticism of cooperation with international companies, since with the collapse of state institutions and the emigration of large numbers of Iraqi oil industry experts, such cooperation became necessary. The Iraqi National Oil Company, however, should have had an active role in monitoring the execution of contracts by international companies, according to what is agreed upon, thus providing an opportunity to train a new generation of Iraqi specialists. The problem lies in the specific objectives, namely production increase from 2 million to 3 million barrels per day to 12.5 million barrels per day within a period of less than a decade, in a country lacking political stability and on the brink of civil war.

Finally, producing 12.5 million barrels per day within a short period of time means that markets will be flooded with oil supplies, leading to intense competition with other OPEC and non-OPEC producers. This would force discounts and lead to a decrease in revenues. This means the country would receive an oil income of far less than expected, which contradicts the main objective of the oil policy.

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More from  Walid Khadduri