Basra, Iran... It all comes down to oil

Behind the recent fighting in Basra, which has halted the further withdrawal of British troops from Iraq, lies a three-letter word - oil. It is no coincidence that the day Iraq's prime minister Nouri al-Maliki ordered the Iraqi army into Basra to fight the militia of Moqtada al-Sadr, negotiations began in Jordan for contracts to repair and upgrade existing oil fields around Basra and exploit three huge new fields in the desert further west.

These deals with multinational companies could triple the output from the Basra oil region, already one of the richest in the world. Who controls Basra controls much of the future wealth of Iraq and the upper Gulf.

Al-Maliki belongs to the Dawa Party, the smallest of the three major Shia political movements in Iraq, whose influence across the oil-rich south has been steadily waning. Last month he gambled that Iraqi army units, newly trained by the US and UK, could beat the Mahdi Army of Moqtada al-Sadr.

Under the pretext of "winning back the streets of Basra from the militias and criminal gangs," al-Maliki launched a force of some 30,000 to dislodge Moqtada's men from their strongholds in Basra, Amarah and Kut. After six days of heavy street-fighting, the Iraqi army made no headway. Moqtada's men have won an enormous psychological victory that they did not expect. The Mahdi Army now looks like the strongest Iraqi force in central and southern Iraq, more capable than the Iraqi army itself.

Al-Maliki, described recently by a British military adviser as having "almost no strategic judgment", was urged to action by American neo-con militants like retired General Jack Keane and Fred Kagan of the American Enterprise Institute. But American and British commanders urged caution, believing the Iraqi army wasn't yet up to the job. So al-Maliki told allied commanders of his plan to put troops into Basra only a few hours before they went in.

Al-Maliki clearly fears that Moqtada will win the provincial elections due later this year - and that they will deliver him real power over Basra and its oil.

What concerns al-Maliki and the US neo-cons is Moqtada's interpretation of Iraq's new oil law - which they believe is likely to favour Tehran rather than Baghdad in the commercial development of common fields and common pipelines. The law is deliberately ambiguous about exploitation of fields which run across national boundaries. The oil minister, Hussein Shahrastani, whose ancestry is from Iran, has kept silent about what happens to oil fields that extend into Iran - where there are already accusations of the Iranians pumping oil from under Iraq.

The American hawks under Dick Cheney fear that Moqtada's propaganda win in Basra will be linked to Iran's recent successes in energy politics. A further blow to the White House policy of isolating Iran by sanctions was a deal struck by the Swiss last month to buy 194tr cubic feet of gas from Iran annually from 2011. It was sealed at a ceremony in Tehran where Micheline Calmy-Rey, the Swiss foreign minister, was photographed shrouded in a headscarf, smiling and shaking the hand of President Ahmadinejad.

Ironically, the Americans' favourite Shia leader, Abdul Aziz al-Hakim, would likely be no less pro-Iranian than Moqtada when it comes to oil. Al-Hakim wants to see Iraq become a loose federation, with Basra at the centre of a southern super-region. In Tehran, that is seen as an opportunity for closer ties, possibly even the use of Iranian pipelines and ports to transport Iraqi oil.

So the oil card is slipping from Washington's hand, thanks to the misjudgment of al-Maliki in attacking Moqtada's militias. In the dying days of the Bush regime, fears are growing again that if the America can't win the oil contest, it will resort to force - even the bombing of Iran. At least the main regional leaders, Turkey, Egypt and Saudi Arabia, have told Dick Cheney they won't go along with such a suicidal move. ·