The signs are that, on both fronts, the administration will carry on playing for time. Bush and his officials are already suggesting they will maintain the surge for another year, and that Petraeus's report will merely be an interim score card. It will not use the fateful Vietnam-era language of light at the end of the tunnel, but it will say progress is under way and therefore more congressional patience is needed.

Similarly Ryan Crocker, the US ambassador in Baghdad, is playing down the urgency of the benchmarks. He has reminded the US media that Congress can take years to make reforms on complex issues such as immigration and healthcare. He argues it is unfair to expect the Iraqi parliament to do everything as fast as outsiders might wish.

That said, the administration - particularly the vice-president, Dick Cheney - and the oil lobby are enraged that the oil law is stalled. The main reason is not that the Iraqi government and parliament are a lazy bunch of Islamist incompetents or narrow-minded sectarians, as is often implied. MPs are studying the law more carefully, and have begun to see it as a major threat to Iraq's national interest regardless of people's religion or sect.

This is the second bit of good news from Iraq. Civil society, trade unions, professional oil experts and the media are stirring on the oil issue and putting their points across to parliament in the way democracy is meant to work. The oil unions have held strikes even at the risk of having leaders and members arrested.

The pervasive outside image of Iraq as a country in free-fall where violence on a mass scale is an ever-present threat is not wrong. But it can mask the fact that "normal life" and indeed "normal politics" are still possible. The real reason why the Bush administration wanted the oil law rushed through was that it feared public discussion, and was worried that the more people understood what the law entails, the greater the chances of its defeat. Key parties in the Iraqi parliament oppose it, including the main Sunni party - which this week withdrew from government - as well as the Shia Sadrists and Fadhila.

Washington has promoted the law as a "reconciliation" issue, claiming its early passage would show that Iraq's ethnic and sectarian communities could share revenues on a fair basis. But this is a trick. Only one of the law's 43 articles mentions revenue-sharing, and then just to say that a separate "federal revenue law" will decide its distribution. The first draft of this other law only appeared in June, and it is clearly unreasonable to expect the Iraqi parliament to pass it in less than two months.

The law that Washington and the US oil lobby really want would set the arrangements for foreign companies to operate in Iraq's oil sector. Independent analysts say the terms being proposed are far more favourable for foreign oil companies than those of any other oil-producing state in the region, including Kuwait and Saudi Arabia. They all impose some safeguards for the national interest, whether it is having a national company that controls production; specifying in contracts the maximum level of foreigners' profits; limiting foreigners to a small number of fields; or insisting that disputes are arbitrated in local rather than international tribunals. Other big oil countries, including Russia and Venezuela, insist on parliamentary approval for contracts covering "strategic" fields or for joint ventures.

Platform, an oil industry watchdog, warns that the Iraq oil and gas law could "sign away Iraq's future". Greg Muttitt, its co-director, says: "The law is permissive. All of Iraq's unexploited and as yet unknown reserves, which could amount to between 100bn and 200bn barrels, would go to foreign companies."

Public pressure has already brought some changes. The first drafts of 2006 talked of production-sharing agreements, a system of concessions like those Russia gave to foreign oil companies in the days of proto-capitalist weakness in the early 1990s, and which Moscow no longer uses. The latest Iraqi drafts now talk of "exploration risk contracts". They could last for 30 years without a chance of revision, and be equally bad.

One of the most significant aspects of Iraqi society's awakening on the issue is a recent letter to parliament from 106 Iraqi oil industry technocrats, including exiles who fled the Saddam regime. They argue that there is no need to rush the law, since at a time of insecurity no foreign investment is likely. They want parliament to have the right of scrutiny of proposed contracts with the national oil company. They propose passing the revenue-sharing law before the oil law, and not vice versa - an eminently sensible view that Bush should adopt.

Whether the issue came up in Camp David this week is unclear, but the British government's role - like that of most western governments - has not been good. Working closely with the Americans, British officials in Baghdad saw drafts of the law before the Iraqi parliament. Britain supports the IMF line that Iraq's final tranche of Saddam-era debts cannot be forgiven until Iraq has a law permitting foreigners a role in the oil industry.

As a staunch supporter of the current international financial architecture, Gordon Brown is unlikely to press for a relaxation of these unfair terms. More's the pity, since the best way for Iraq to prosper once the occupation is over and it finally solves its sectarian crisis is to have maximum control over its major natural resource. Most Iraqis believe the invasion of 2003 was largely about oil. Peace is also about oil, and it surely makes sense not to let the panic and distraction of the current security crisis be used as a cover for handing the country's wealth to foreigners.

j.steele@theguardian.com