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RPT-Is Iraq's looming oil boom a blessing or curse?

* Iraqis hope oil output boost ushers in era of prosperity

* Kirkuk row, corruption highlight "resource curse" risk

* Oil money influx could hurt private sector

By Deepa Babington

BAGHDAD, Nov 22 (Reuters) - Iraq hopes a petrodollar gush it will uncork by tripling oil output will drag it out of chaos into prosperity, but there is just as much chance the new wealth will fuel fresh conflict.

Home to the world's third-largest oil reserves, Iraq also plans to leap to third place among oil producers -- spurring hope among war-weary Iraqis of a windfall to drive development and job creation after decades of economic decline. [ID:nL3558520]

But rampant corruption, political inertia and ethnic feuding over oil-producing regions like Kirkuk mean that years of sectarian bloodshed could just as easily be followed by years of fighting for control of oil, experts and Western officials say.

"The jury is out on whether the Iraqi political class will figure out how to use oil revenues to strengthen national unity or whether they will engage in mutually destructive feuds over how to divide up the pie," said David Mack, a former U.S. envoy who worked in Baghdad in the mid-1960s and late 1970s.

There is scepticism over whether Iraq, burdened with poor infrastructure, can actually hike output to 7 million barrels of oil per day in six years from 2.5 million bpd now. There is a good chance it will face resumed quotas from its OPEC partners.

But even a more modest rise to 4 million bpd could bring $45 billion extra to state coffers annually, at today's prices.

For nations like Iraq -- languishing at second last in per capita income terms among lower middle income countries in the Middle East and North Africa -- the potential for more damage than good from a sudden cash influx is huge, analysts say.

One risk is that inflation could soar and the central bank lose control over the exchange rate.

The inevitable discontent over the distribution of oil proceeds could also flare long-simmering tensions between Sunnis, Shi'ites and Kurds in a nation still recovering from sectarian war after the 2003 U.S.-led invasion.

The northern oil city of Kirkuk has become a symbol of the challenges ahead, as the Arab-led government in Baghdad and Kurdish authorities battle over who has the right to control it and to ink deals on oilfields around it.

With majority Shi'ites controlling southern output in Basra and Kurds overseeing abundant northern fields, minority Sunnis could end up feeling left out of the oil bonanza, said one Western official, who declined to be named.

"The Iraqis have got to be very careful about how they manage their oil money," the official said.


Liza Barzan of Mercy Corps, which trains Iraqi leaders in conflict resolution and mediation, said it was not certain that Iraqis will settle future disputes with guns rather than words.

"If you put aside politics and the influence of special interest groups that encourage violence, the average Iraqi is quite willing to negotiate," said Barzan. "There has been violence for decades, but if you look at history, that's not the case. Violence is not part of the culture."

Even so, Iraq will have to plough most of its initial oil wealth into infrastructure to benefit industry, which could anger Iraqis waiting for better power and water supply.

"People will see the oil money coming into the country, but it won't be keeping pace with what they want to see," another Western official said.

Longer term, Iraq risks becoming a state-dominated economy reliant entirely on oil, with a neglected private sector.

Already, oil accounts for 95 percent of government revenues.

Then there is corruption, which has ensured that only a small elite has benefitted from oil wealth in producers like Nigeria and Angola. Iraq ranks fifth from the bottom in Transparency International's corruption ranking of 180 nations.

"Given the size of Iraq's oil reserves, I'd think that some of the wealth has to trickle down," said Daniel Drezner, a Tufts University professor. "That said, given the corruption in Iraq's government, I would be very surprised if the people received more than a trickle of this income." (Editing by Michael Christie and Jon Loades-Carter)

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