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Article: sanctions and the oil market

The following article is published on the web site of the Oxford Institute
of Energy Studies (Monthly Comment for November 1999). If you would like to
comment on this article, please direct your comments to me, and I will
forward them to Dr. Rosser.


by Dr. Kevin Rosser
Oxford Institute for Energy Studies

Iraq's decision on 22 November to suspend oil exports, helping to send oil
prices to highs not seen since the Gulf war, underscores the continuing
turmoil surrounding international policy on Iraq. By all accounts the UN
economic sanctions imposed on the country nine years ago after the invasion
of Kuwait have reduced it to hardship. Having led Iraq into a disastrous war
with Iran from 1980-88 and perpetual battles with the Security Council since
1990, the regime sheds a river of crocodile tears over its people's
suffering as if it had no responsibility for their plight. The main
architects of the policy, the USA and the UK, accuse Baghdad of exaggerating
the pain in order to gain sympathy but privately realise sanctions are
debilitating Iraq's society. So Saddam Hussein must be savouring the irony
this month as the permanent members of the Security Council try to hammer
out a compromise on a draft UK-Dutch resolution to suspend sanctions which
Iraq already declares it will reject.

How is it that the United States and its allies appear to be in a bigger
hurry to ease sanctions than the Iraqi government itself? The answer reveals
a lot about the shortcomings of international policy on Iraq and the
regime's own determination to outface its punishers, whatever the cost. It
also suggests that the strategy of containing Iraq through restricting its
ability to export oil is beginning to crumble, with uncertain consequences
for the market.

There is no question sanctions are hurting. One commonly cited estimate puts
the value of Iraq's foregone oil exports alone at $100 billion. The country
is divided into two parts, the government-controlled central and southern
regions, and three autonomous Kurdish provinces to the north. Studies by the
UN and private relief agencies show that while humanitarian conditions in
the north have stabilised due to the accessibility of international aid,
those in government-held areas, where four-fifths of the population live,
have deteriorated sharply. For a country that once boasted one of the
highest standards of development in the Middle East, the descent into
squalor has demoralised the populace, which is more concerned with daily
survival than overthrowing the government.

Far from disabling the regime, sanctions have become its life support
system. The government's control of the black market and the food
distribution system gives it powers of reward and punishment to augment an
already fearsome internal security apparatus. This has bought it breathing
space to exploit Iraq's humanitarian misery in the Security Council and wear
down the UN consensus on containment. Moreover, compared to five years ago,
when Iraq was banned from selling oil and forced to admit UN weapons
inspectors, the situation today could hardly be more different. Iraq is now
allowed to export up to $10.5 billion worth of oil a year. In December 1998
it succeeded in expelling the inspectors from Baghdad, incurring a US and UK
bombing campaign but no cancellation of the oil-for-food programme. This is
significant because the regime wants sanctions lifted so Iraq can reassume
its regional mantle, but not at the cost of relinquishing its weapons of
mass destruction - essentially the deal on the table in New York this month.
Aware that the agony of Iraqi people is eroding the Security Council's
resolve, the government is in no rush to see sanctions suspended now if
prolonging them means a deal on its own terms later.

Meanwhile sanctions have become a political millstone for the United States.
They have failed to unseat the regime or compel it to abandon its nuclear,
chemical and biological weapons. At the same time, Washington knows that
dropping sanctions unconditionally would be touted as a victory by Saddam
and remove any remaining incentive he has to co-operate with the weapons
inspectors. The oil-for-food programme begun in 1996 to soften the blow of
sanctions and shore up political support is hampered by delays and
accusations of obstruction. On the Security Council, France, Russia and
China dislike US unilateralism and are keen to resume business with Iraq - a
split the regime has widened by promising oil production sharing agreements
to all three once sanctions are lifted. More worrying still, popular
sympathy for Iraq's people is running high in the Middle East, where even
such traditionally dependable allies as Turkey, Egypt, Saudi Arabia and the
Gulf states are at pains to distance themselves from the American position.

In the US itself Iraq policy is no less divisive. From the left there is
growing criticism of sanctions' harshness, while the Republican-dominated
Congress, which last year authorised $97 million to fund Iraqi opposition
groups, is clamouring for tougher action to topple Saddam Hussein. A few
legislators have even spoken of arming the opposition, seemingly forgetting
the fraught record of past interventions in places like Cuba, South Vietnam
and Nicaragua. The looming presidential campaign narrows the
administration's room for manoeuvre even further. If it allows sanctions to
remain in place, it runs the risk of appearing callous and stretching
international consensus to the breaking point. If on the other hand it is
seen to go soft on Saddam, Republican hard-liners could pounce and corral
the administration into adopting a more activist approach to subverting
Iraq's government. From the administration's viewpoint, suspending sanctions
is attractive because it defuses humanitarian criticism and puts the focus
back on Iraq's weapons. And if Iraq tries to renege, sanctions can be
reinstated and the blame laid at Baghdad's door.

Whatever the outcome, the implications for oil are unsettling. Iraq was
thought to be maximising current production capacity when output peaked in
September at 2.8 million b/d; production fell last month to about 2.5
million b/d. Of this, 550,000 b/d is for domestic consumption, 70,000 b/d is
earmarked for Jordan, and the remaining 1.8 million b/d is available for
export. The oil-for-food programme created by UN resolution 986 has
contributed to market volatility in two ways. Firstly, because the
resolution defines a revenue rather than a volume ceiling, Iraq is
effectively immune to the price changes that concern its neighbours so long
as it has the production capacity to meet the ceiling. Secondly, decisions
affecting production levels are driven primarily by the unpredictable
political dynamics of sanctions and only secondarily by market
considerations. On two occasions when renewal of the six-monthly
oil-for-food phases ran into snags at the UN, in June and December 1997,
some 700,000 and 1 million b/d respectively were abruptly removed from the
market and then restored a few weeks later. The latter case coincided with
the Security Council's decision in February 1998 to increase the revenue
ceiling from $2 billion to $5.2 billion every six months, followed by
another resolution in March allowing Iraq to increase production to make up
for past delays and low prices. This paved the way for a production increase
from 1.7 million b/d in February to 2.4 million b/d by August, contributing
significantly to the supply overhang that resulted in the oil price crisis
of 1998. As recently as this month, Iraq's announcement on 22 November that
it would halt exports in protest at the Security Council's two-week
extension of the oil-for-food programme helped to send crude prices to their
highest level in years. Even if sanctions are suspended, the periodic
renewals that would continue to be part of the new arrangements mean there
is no guarantee that similar disruptions could not recur. Indeed, because
suspension would give Iraq the opportunity to repair damaged facilities and
expand capacity, the market's exposure to the messy politics of sanctions
would be all the greater.

There is an argument to be made for revising the UN's approach to Iraq so
that its objectives are met more effectively. It is worth recalling that an
entire generation of young Iraqis has known nothing but deprivation,
isolation and embitterment these past nine years, a Versailles-like legacy
that may well outlast the regime of Saddam Hussein. Containing Iraq is an
unenviable task. But the time may have come to admit that sanctions - in
their present form - are doing more injury to innocent people and to the
moral authority of the sanctioners than to the regime itself. A new policy
is needed if the UN is to have a chance of success.

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