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Let China pump Iraq's oil

June 3, 2013: 1:46 PM ET
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Workers in an Iraqi oil field. A big chunk of Iraq's oil is going to China, and that's no bad thing.

A big chunk of Iraq's oil production is going to China, according to a story Monday in the New York Times. That may be a good thing for both U.S. companies and consumers.

The Times reported on what has been an ongoing trend -- companies from China and elsewhere winning Iraqi oil contracts. According to the story, nearly half of Iraq's oil now goes to China.

The article played up the seeming absurdity in this. The United States and its allies, after all, are the ones that paid heavily (through the loss of lives as well as money) by ousting Saddam Hussein and trying to keep the peace afterwards. That ended the sanctions on Iraq's oil industry, now allowing for a huge wave of investment that's expected to double the country's oil output over the next decade or so.

But the fact so much of this investment is coming from China isn't necessarily bad, which the story acknowledged but did not dwell on.

More oil on the global market generally lowers oil and gasoline prices. Oil is a globally traded commodity. It does not matter which company or country is pumping it or consuming it. If the Chinese want to gulp more oil, it's high time that Sinopec (SPH) and other big Chinese energy companies spend the money and take the risks of getting the stuff out of the ground.

And if they want to do it in Iraq, all the power to them. Exxon Mobil (XOM), BP (BP), Royal Dutch Shell (RDSA) and other international oil firms aren't being more aggressive in bidding for Iraq's oil because the terms are pretty lousy.

Royalties, taxes and other fees in Iraq typically take 90% or more of a firm's profit. The comparable figure in the United States is somewhere around 50%. With the U.S. shale boom in full effect and deep water opportunities expanding worldwide, there are plenty of places oil firms can invest. In most parts of Iraq, the international oil firms don't even get a cut of the profits -- they are restricted to working on a contract basis.

"That is not how Exxon made its fortune," said Fadel Gheit, a senior energy analyst at Oppenheimer. "Exxon wants a 20% or 25% return on its investment, not the 3% or 5% Sinopec is willing to work for."

Eliciting sympathy for oil companies may be a hard sell. Yet nearly 50% of oil company stock is held in either pension funds or IRAs. So many individual investors benefit from higher profits for big oil firms.

So if the Chinese want to settle for lower margins in Iraq -- and help keep a lid on gas prices in the process -- what's the problem?

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