Oil-price cuts imperil Iraq progress

BAGHDAD - Iraq's government will have dramatically less money to spend this year than expected because of plunging oil prices, a dire economic situation that has already forced the country to slash rebuilding plans by 40 percent, the Associated Press has learned.

As the United States sets a timetable for withdrawal, many fear that cutbacks on spending and jobs could trigger heightened violence.

U.S. commanders have repeatedly warned that without speedy economic development and reconstruction, the sharp improvements in security since the U.S. troop surge of 2007 could be at risk in a country where 38 percent of the workforce is estimated to have no job or only part-time employment.

But rebuilding the country requires money. And with oil prices plummeting, the government has been forced to cut planned spending - by one-third overall and 40 percent for rebuilding, Iraqi officials told the AP - and to consider even deeper reductions.

It is a drastic turnaround from just months ago when U.S. lawmakers complained that Iraq was swimming in cash from high oil revenues and should do more to help itself, rather than spend U.S. taxpayer money to rebuild.

Iraq is almost entirely dependent on oil money. More than 90 percent of the government's revenue comes from oil sales. The government says it earned about $60 billion from oil sales in 2008 but has not said publicly how much it expects to take in this year.

The government has already scaled back its 2009 budget twice. It is now is set for $53.7 billion, down from the original planned $79 billion and from an interim cut to $68.6 billion, according to the Finance Ministry. Money earmarked for reconstruction has been cut from $21 billion to $12.54 billion, and officials warn that more cuts may be necessary if oil prices continue to fall.

Yesterday, Iraq's finance minister urged Iraqis to save money and prepare for "hard days to come," but he pledged that government salaries would not be cut back, at least this year.

The most recent Iraqi budget was based on an assumption that oil prices would average $50 a barrel this year. This week, oil prices fell below $34 a barrel but recovered to about $44 yesterday. That is down from the high, just last summer, of $147 a barrel.

Although some projects may have to be delayed, the Iraqis are gambling that oil prices will recover enough to eventually complete them all. But in the short term, the global economic crisis has reduced demand for oil, and that could last a significant amount of time.

"The question will be what happens if oil stays depressed going into 2010 and even beyond," U.S. Ambassador Ryan Crocker said yesterday. "This country is and will remain for some time really hydrocarbon-dependent."

It is not clear if the United States would change its plans to draw down American troops if violence in Iraq worsened. President Obama said Wednesday that his goal was to withdraw all combat troops within 16 months.

For now, the prospect of even a slowdown in reconstruction money holds dire security implications. Key danger areas include the shell-pocked streets of Mosul, where Sunni militants are still holding out; Anbar province, where Sunni tribes turned against al-Qaeda; and the southern city of Basra, where U.S.-backed Iraqi forces broke the grip of Shiite militias last spring.

In those areas, U.S. commanders have warned that security improvements are fragile and that the population badly needs economic development. In Mosul, Iraq's third-largest city, Police Gen. Khalid Soltan said that "half of the terrorists" in the city could be defeated "if we defeat unemployment," now estimated at more than 60 percent.

That is no small task in a city filled with abandoned and bullet-riddled shops, bomb-shattered buildings, and heaps of garbage. Overall, Iraq still needs significant rebuilding. The United Nations estimates that more than half the country's 27 million people lack access to one or more essential services such as clean water, electricity and health care.