on is also debilitating. Experts estimate that 150,000 to
200,000--and perhaps as many as 500,000--barrels of oil per day are
being stolen. Controlled prices for refined products result in
shortages within Iraq, which drive consumers to the thriving black
market. One senior U.S. official told us that corruption is more
responsible than insurgents for breakdowns in the oil sector.

The Politics of Oil

The politics of oil has the potential to further damage the country's
already fragile efforts to create a unified central government. The
Iraqi Constitution leaves the door open for regions to take the lead
in developing new oil resources. Article 108 states that "oil and gas
are the ownership of all the peoples of Iraq in all the regions and
governorates," while Article 109 tasks the federal government with
"the management of oil and gas extracted from current fields." This
language has led to contention over what constitutes a "new" or an
"existing" resource, a question that has profound ramifications for
the ultimate control of future oil revenue.

Senior members of Iraq's oil industry argue that a national oil
company could reduce political tensions by centralizing revenues and
reducing regional or local claims to a percentage of the revenue
derived from production. However, regional leaders are suspicious and
resist this proposal, affirming the rights of local communities to
have direct access to the inflow of oil revenue. Kurdish leaders have
been particularly aggressive in asserting independent control of their
oil assets, signing and implementing investment deals with foreign oil
companies in northern Iraq. Shia politicians are also reported to be
negotiating oil investment contracts with foreign companies.

There are proposals to redistribute a portion of oil revenues directly
to the population on a per capita basis. These proposals have the
potential to give all Iraqi citizens a stake in the nation's chief
natural resource, but it would take time to develop a fair
distribution system. Oil revenues have been incorporated into state
budget projections for the next several years. There is no institution
in Iraq at present that could properly implement such a distribution
system. It would take substantial time to establish, and would have to
be based on a well-developed state census and income tax system, which
Iraq currently lacks.

U.S.-Led Reconstruction Efforts

The United States has appropriated