And while the core of Russia's increased oil production has come from giant oil fields in Western Siberia, new investment is needed to exploit reserves in more remote areas including the Timon-Pechora region, eastern Siberia, the north Caspian Sea and the Russia Far East. Development of these distant resources is very important to Russia's future but faces technical, economic and bureaucratic barriers. Not only is the geographic terrain extremely challenging, but Russia's uncertain tax and legal regimes have created disincentives to foreign and even domestic investment in these ambitious new "greenfield" investments. Uncertainty about whether and under what incentives private companies will be able to invest in the future pipeline infrastructure needed to service these remote, but prolific oil fields has created apprehension as well. The United States has been pressing Russia to reform the state oil pipeline monopoly Transneft and its pipeline sector, but reform is slow in coming.

Even more profoundly, the Russian oil sector lacks three characteristics that permit Saudi Arabia to play its unique role in world oil markets. First and most importantly, Russia has next to no unutilized capacity. This stands in stark contrast to Saudi Arabia, with excess capacity-in the 1.4-1.9 million bpd range in 2003-sufficient to stabilize world oil markets should a major disruption occurs. The importance of the Kingdom's excess capacity was proven again this year, when it increased production by over a million bpd in the run up to the war in Iraq; without such Saudi intervention, prices might have risen well above $40 per barrel.

Second, Russian oil is relatively expensive, with much of the planned expansion in production slated for geographically remote and geologically challenging fields. This makes Russia's continued production expansion far more vulnerable to a sharp and sustained decline in oil prices than Persian Gulf production. Saudi Arabian oil, in contrast, is among the cheapest in the world to produce-allowing the Kingdom, at least potentially, to weather price declines with less pain.

Third, Russian is not yet a global player. Saudi Arabia has managed to be a base load supplied of oil to the Western Hemisphere, East Asia and Europe, with the first two of these markets areas of high growth. Russia, on the other hand, is basically a European supplier, with virtually no commercial ties to East Asia or North American, to bolster and reinforce its political ties. Russia is considering more global strategies but accomplishing global status might take more reforms than Moscow, with its statist orientation and coterie of state monopolists, is willing to commit to.

Iraq Is No Picnic, Either

With the removal of the regime of Saddam Hussein, Iraq has joined Russia as a possible alternative to Saudi Arabia. Iraq possesses 11 percent of world's proven oil reserves, second only to Saudi Arabia. While its oil sector never fully recovered from the disruption associated with the war with Iran and chronic under-investment during the 1980s, it nonetheless achieved production as high as 3.5 million bpd before the Gulf War of 1991. Under optimal circumstances, Iraq could be very attractive to foreign investors, not least because of its low production costs and proximity to both the Persian Gulf and Mediterranean Sea, giving it easy access to major European and Asian markets.

Some estimate that Iraqi oil production could reach 6-7 million bpd by the end of the decade, making it the world's third largest exporter after Saudi Arabia and Russia, and current plans are to reach 2.8 million bpd by 2005 and 5-6 million bpd sometime after 2010. But these estimates, while geologically possible, might prove to be optimistic for any number of political reasons. Whatever the ultimate course of the U.S. occupation of Iraq, it is clear that security will remain a concern for some time to come. Efforts to resume production since the war have already been hindered by widespread sabotage and lawlessness. Even returning production to the 2.5 million bpd per day level will represent a significant achievement given the vulnerability of oil production and transportation facilities in both the north and south of the country.

It will be expensive to expand Iraqi production, requiring either substantial foreign investment or high levels of foreign aid. At the best of times, Iraqi oil revenues only topped $10 to $12 billion dollars in recent years, with humanitarian assistance taking up 70 percent of those funds. Moreover, Iraq is far from offering the physical security, political stability and legal environment that will make it instantly attractive for major foreign investors. Talk of privatizing the state-owned Iraqi oil industry in order to accelerate investment is particularly premature. The list of obstacles to privatizing the Iraqi oil industry is daunting. It will require, inter alia, the reorganization of the current Iraqi oil industry, enactment of a new body of business law, creation of a regulatory regime, settlement of contentious issues of regional revenue-sharing, rescheduling of Iraq's foreign debt, adjudication of outstanding disputes over concessions granted by the regime of Saddam Hussein, and, not least, some level of democratic legitimacy. Even partial privatization (turning over new oilfield development and greenfield projects to the private sector) will face most of these obstacles.

And will Iraq decide to opt out of opec? The idea that a grateful Iraqi citizenry will relinquish its rights to high oil prices out of gratitude to the United States for their liberation seems, to put it gently, farfetched. At a minimum, continued Iraqi membership in the short- to medium-term would appear to hold little downside risk for a new regime in Baghdad.2 However the questions of privatization and opec membership are decided, Iraq will, barring a collapse into chaos, become a more important producer during the years ahead. In the short run, however, the unstable situation in Iraq there may ironically make the United States more dependent on Saudi oil, not less, depending on how well other countries do in increasing world oil supply.

Other Sources, Other Problems

Even if, due to relatively poor global economic performance in recent years, the projection for world oil use by 2010 has been lowered from 100 billion bpd to 89 billion bpd, producing an additional 12 million bpd of oil-particularly in light of the constraints that Iraq and, to a lesser extent, Russia, face-will be no mean task. A quick tour d'horizon of oil producing regions reveals just how daunting that challenge will be. In Central Asia and the Caucasus, political instability, corruption, unstable customs, inadequate tax and legal regimes, as well as complex transportation issues (including problems created by Moscow), continue to be impediments to bringing major amounts of oil to market. Major increases in Latin American oil output are similarly blocked by regulatory, political and environmental barriers. Faced with debilitating civil strife in Venezuela and a slowing pace of energy sector reform in important countries such as Brazil and Mexico, the United States will be forced to look elsewhere not just for increased oil imports, but even for the level of oil we have been receiving from our southern neighbors. Elsewhere, production in the North Sea is rapidly approaching its geological peak. And most of Asia remains very disappointing in terms of easily accessible, low-cost fields.

This means that, besides Russia, whose future is dependent on a stable investment and legal system not quite in place, the United States can expect to be most dependent on Africa for its increased need for oil imports. According to Baker Institute estimates, Africa, including North African producers such as Libya, could double output to 10 million bpd by 2010, alleviating some dependence on the Middle East. But, current political turmoil in West Africa, most notably Nigeria and Angola, raises real questions about the reliability of already established African production.

Moreover, the United States faces a global competitor: China, which has an active place in Sudan's oil sector and has been pursuing a toehold elsewhere in the continent's oil wealth. Chinese participation in Africa has been accompanied in some cases by Chinese military delegations selling arms, a situation of some concern giving the proclivity towards ethnic and political strife in some key oil producing countries in the region. East Asia frequently pulls one million bpd from West Africa to feed its growing appetite for high quality West African crude.

Ironically, the one supplier the United States might truly benefit from encouraging is Canada, with its 175 billion barrels of tar sand resources-is not being actively pursued. If anything, U.S. politicians have gone out of their way to slight our northern neighbors, backing a natural gas pipeline route that ignores the location of Canadian resources in favor of political featherbedding the city of Anchorage, and fanning disputes over other Canadian non-oil imports such as beef, softwood, wheat and potatoes and potentially salmon, without any regard for the energy consequences of the relationship. Oil sands projects could be a key alternative for the American consumer, with production, which has already reached 800,000 bpd, is expected to rise by 1.5 million bpd by 2010 if currently proposed projects can meet their targets, possibly higher if new projects, under consideration, are added. But even these promising resources face environmental barriers since the process of mining the sands emits carbon and requires the utilization of large quantifies of water.