Mistakes with Iraqi oil

U.S. Vice-President Al Gore must have thought he was playing a humanitarian trump card this month when he proposed that the United Nations lift restrictions on oil production by Iraq. A year earlier, U.N. Sec. Gen. Kofi Annan, just before a visit to Baghdad, doubled the amount of money Iraq may raise for humanitarian purposes by producing oil under U.N. sanctions.

Somebody needs to explain to the vice-president that the only restriction that means anything to the U.N.'s oil-for-food program is the price of oil. The market is in such wretched shape that Iraqi production at the limit of physical capacity comes nowhere close to reaching Annan's $5.2 billion/180-day generosity. Thanks partly to unbridled Iraqi output, the price of oil is too low. For the same reason, oil producers in Gore's own country are going out of business, and U.S. allies in the Middle East are suffering.

Drawing account

With its oil-for-food program, the U.N. has been using Iraqi oil flow as a drawing account for food and medicine. There's nothing wrong with the humanitarian intent. What's wrong is that the program sets boundaries in terms of gross proceeds.

Iraq now produces at maximum rates, regardless of the price of oil, because the U.N. program exempts it from economic self-governance. As long as Iraqi President Saddam Hussein can't have what he wants, an end to sanctions and control of oil revenues, he'll settle for helping to wreck the oil market and weaken his oil-producing neighbors.

Annan has been a well-meaning dupe in this dangerous game. Now Gore proposes to usurp the role by raising a meaningless ceiling.

Some observers claim that Iraq would be producing at current levels or more if sanctions didn't exist, so structure of the oil-for-food program doesn't matter. There are reasons to doubt the view. A report by U.N. inspectors says Iraq's oil fields are in bad shape (OGJ, Jan. 18, 1999, p. 23). And the Iraqi government has had to ask the U.N. to divert oil-for-food revenues to oil-field maintenance and spare parts.

These are not signs of a country, even one with Iraq's huge reserves, able to easily meet an announced goal of raising production capacity to 3.5 million b/d in the next 2 years. If the U.N. removed all limits on oil production in Iraq and on use of the proceeds but continued to exclude foreign capital, Iraqi flow would almost certainly decline.

Damage to the global oil market from flat-out, price-blind Iraqi production needs more attention than it has received. Discussion focuses on inadequacy of the 27.5 million b/d group quota set in November 1997 by the Organization of Petroleum Exporting Countries and on members' alleged refusal to comply.

In fact, the International Energy Agency's Monthly Oil Market Report estimates December production by OPEC members at 27.4 million b/d. Only two OPEC members, according to IEA, seriously exceeded their individual ceilings: Venezuela, by 400,000 b/d, and Iraq, by 1.1 million b/d. Even with those violations, OPEC was producing within quota, which everyone knows is excessive. If the two violators just produced at quota and other members held output to December levels, OPEC production, at 25.9 million b/d, would fall below estimates of what the world needs from OPEC. For all of 1999, Oil & Gas Journal puts the call on OPEC crude, net of a large projected stock drawdown, at 26.7 million b/d (see Forecast & Review, p. 49).

Crude gush

By suspending economic decision-making about Iraqi production, the U.N. oil-for-food program has created a crude gush, some significant share of which would vanish for at least a while if Baghdad had reason to frame its behavior within something resembling economic principle.

Gore has at least called attention to a problem too long ignored. It would be nice if he understood it better and if he and Annan woke up to how humanitarian mistakes advance the Iraqi dictator's strategic designs.