MERIP Press Information Note 32

              Running for Cover: The US, World Oil Markets and Iraq

              Chris Toensing

              September 28, 2000

              (Chris Toensing is editor of Middle East Report.)

              Last week's panic within the Clinton Administration over a potential winter
              spike in heating oil prices has greatly eased, as oil prices have begun to
              fall. The Democrats' political planners feared that Republican candidate
              George W. Bush and voters would blame Clinton and Vice President Al Gore for
              failing to forestall the price rise that dominated the news for the last two
              weeks. Hence Clinton's acquiescence in Gore's September 21 call for the US
              to dip into its Strategic Petroleum Reserve (SPR) despite the counsels of
              Administration technocrats, like Treasury Secretary Larry Summers, that
              tapping the reserve would not significantly lower oil prices over the long
              term.

              The SPR release was only one of several Administration strategies behind the
              scenes to find political cover as oil prices rose. One strategy that briefly
              surfaced in the media was to blame the turbulent oil markets on planned
              "disruptions" in Iraqi oil production. The Iraqi regime obliged last week by
              voicing harsh criticism of Kuwait and Saudi Arabia--accusing those countries
              of stealing Iraqi oil--and apparently sending an Iraqi plane into Saudi
              airspace. US officials appear to believe that the shrill Iraqi rhetoric
              mirrors Iraq's threats against Kuwait in 1990. Iraq, they argue, is looking
              for ways to increase its leverage in the ongoing debate over economic
              sanctions and how to implement the Oil-for-Food program. Will the
              Iraqis--still the sixth-largest supplier of crude oil to Western markets
              despite sanctions--cut back production to drive up prices?

              THE REAL IRAQI CALCULUS

              Iraq's belligerence was about more than Oil-for-Food. Rather, Iraq was
              greatly concerned about today's UN Compensation Commission (UNCC) meeting.
              At this meeting, the UNCC accepted a huge $15.9 billion Kuwaiti claim for
              oil field damage caused by the Iraqis in 1990-1991. Baghdad not only sees
              this compensation demand as excessive, but also fears that the claim could
              open the floodgates for more large claims against Iraq by various other
              countries and companies. The regime can ill afford this danger to its
              revenue base.

              Faced two weeks ago with this prospect, Baghdad signaled that it was
              prepared to take drastic action, maybe even temporarily suspending its oil
              exports under the Oil-for-Food program. On September 20, the five permanent
              members of the Security Council concocted a diplomatic face-saving formula.
              With Russia, France, China and two temporary members of the committee,
              Tunisia and Malaysia, calling for delay on the Kuwaiti compensation
              decision, US and UK officials at the UN suddenly began to emphasize the need
              for consensus among all UNCC members before moving ahead with the claim.

              September 27, the five permanent Security Council members reduced the amount
              of oil export revenue to be used for Iraq's reparations payment from 30
              percent to 25 percent effective in December, probably assuaging Iraq's anger
              at the scale of the Kuwaiti claim for now. Given the recent signs that
              Iraq's international isolation is lessening--with Venezuelan President Hugo
              Chavez visiting Iraq and French and Russian planes landing in Baghdad--the
              UN allies of the Iraqi regime are pressing Iraq to claim a political victory
              and rest easy that Iraqi concerns are being taken seriously by the council.
              Iraq's deputy foreign minister, Riyad al-Qaisi, scoffed today at the five
              percent decrease in the oil sales contribution to reparations. But cooler
              heads will likely prevail: Iraq has no immediate cause to suspend exports.

              US POLITICKING IN THE G-7 AND OPEC

              To magnify the effect of the SPR release on the market, the US is pushing a
              coordinated release of reserves by the entire G-7 group, or a subset
              thereof, on September 29. The US wants broad cooperation from the G-7, both
              because world prices would be much more likely to fall and because
              coordinated action would insulate the Administration from Republican
              charges--voiced last week by Bush--that the SPR release holds long-term
              energy security hostage to US electoral politics. The Europeans need the
              coordinated release because French and UK Prime Ministers Lionel Jospin and
              Tony Blair, and even German Chancellor Gerhard Schroeder, are feeling
              threatened by deepening fuel protests. US officials are investigating the
              impact of a release among large oil companies. France and Spain have long
              favored a release of petroleum reserves, and now the last holdout, Germany,
              appears to be wavering. It is likely that a coordinated G-7 action for a
              period of three months would cause prices to fall by $3-4 per barrel,
              diminishing even further the political pressure on governments on both sides
              of the Atlantic.

              Meanwhile, the US called on OPEC to hike production at its September 25
              meeting. The OPEC meeting was mostly uneventful, stressing "stability and
              cooperation" as usual. Only Saudi Arabia has the spare capacity to cover the
              extra production, and the Saudis would prefer not to tap it. Hence the
              Saudis welcomed news of a possible G-7 SPR release. The threatening
              statements emanating from Caracas probably only reflected Venezuela's
              position, and do not signal that OPEC will cut production.

              OIL MARKETS, DECEMBER SURPRISES

              Falling oil prices have lightened the tense atmosphere of the last two
              weeks, when Iraqi threats to cut production and US saber-rattling fueled
              increased speculation about an "October surprise"--intensified US bombing of
              Iraq. But the latest round of UN compromises doesn't alter the fundamental
              irritants to Iraqi-Western relations: sanctions remain in place and
              Washington will keep them there as long as Saddam Hussein rules Iraq.
              Ironically, the cooling of tensions now may presage sharper tensions over
              oil in the coming months.

              Iraq is not especially eager to wield its oil weapon. Key European
              states--France, Germany, the Netherlands--are reeling from the social impact
              of high oil prices, and Iraq wants to avoid alienating them so that the
              erosion of international consensus on sanctions may continue. The oil weapon
              might not be so effective in any case, since the resulting oil output gap
              could be partially filled by a Saudi production increase.

              But the UN compromise on the Iraq reparations payment issue does not preempt
              the possibility that Baghdad will suspend oil supply in the coming months.
              At the end of the current eighth phase of Oil-for-Food program in early
              December, Iraq may be tempted to halt exports. Baghdad certainly paid
              attention when the US and UK quieted their clamoring for the Kuwaiti claim
              in the UNCC because they feared the consequences for Iraqi supply. A looming
              Iraqi export suspension will keep nagging pressure on the Security Council
              to soften the terms of the Oil-for-Food deal, especially the contract
              approval process that allows the US and UK to hold up otherwise approved
              transfers of goods to Iraq. As early as December, the lame duck Clinton
              Administration may once again be running for political cover as Iraqi
              threats, rising global consumption and winter weather cause oil prices to
              rise anew.

              (When quoting from this PIN, please cite MERIP Press Information Note 32,
              "Running for Cover: The US, World Oil Markets and Iraq," by Chris Toensing,
              September 28, 2000.)

              -----

              For background on US policy toward Iraq, see MERIP PIN 29: "Politics, Not
              Policy: Behind US Calls for War Crimes Tribunals for Iraq"
              http://www.merip.org/pins/pin29.html

              For analysis of US oil policy in the Middle East, see Simon Bromley, "Oil
              and the Middle East: The End of US Hegemony?" in Middle East Report 208
              (Fall 1998).

              The summer 2000 issue of Middle East Report (MER 215), "Iraq: A Decade of
              Devastation," offers critical assessments of both US-led economic sanctions
              and the strategies of the Iraqi regime. Phyllis Bennis's introductory
              article, "'And They Called It Peace': US Policy on Iraq," is accessible
              online at:
              http://www.merip.org/mer/mer215/215_bennis.html

              To subscribe or order individual copies, call Blackwell Publishers at
              1-800-835-6770.

              ----

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