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Iran/Iraq - oil prices's Global Intelligence Update - 8 June 2000
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Why the Price of Oil Will Likely Remain High


Iraq will soon increase oil exports by 700,000 barrels per day,
reopening the previously damaged Khor al-Omaia oil terminal.
However, illegal Iraqi oil exports depend on Iranian cooperation to
find their way to the open waters of the Persian Gulf. As a result,
Tehran will soon use its newfound leverage to influence decisions
on production and prices at the upcoming meeting of the
Organization of Petroleum Exporting Countries (OPEC). If Tehran
gets its way, the price of oil will hover at the comparatively high
price of about $28 per barrel.


Rafid al-Diboni, director general of Iraq's state-run Southern Oil
Company, told the Al-Ilam newspaper June 7 that two of four loading
quays at Khor al-Omaia oil terminal have been repaired and will
resume operations "soon." Located just west of Iraq's main oil
terminal at Mina al-Bakr, Khor al-Omaia was virtually destroyed in
the 1980-88 Iran-Iraq war and damaged again in the 1991 Gulf War.

According to the U.S. Energy Information Administration (EIA),
repairs began in 1993. When the terminal is fixed, its capacity
will near 1.2 million barrels per day (bpd). With two of four
loading quays reportedly repaired, Khor al-Omaia should be able to
boost exports by 600,000 to 700,000 barrels each day. With current
Iraqi production around 2.6 million barrels, such an increase would
put Iraq's output near 3.2 - 3.3 million bpd - close to pre-Gulf
War levels.

Iraq clearly timed its announcement in advance of the next OPEC
meeting in Vienna, Austria, in two weeks. There the cartel will
decide whether to raise production and lower prices, now at about
$28 per barrel. Baghdad probably made its announcement in the hope
of swaying the cartel not to raise production quotas; the Iraqi
regime is not subject to quotas because of U.N. sanctions dating
back to the Gulf War, and Baghdad favors limiting production and
propping up prices. Oil smuggling accounts for nearly all of the
country's revenues beyond the ceiling set by the U.N. oil-for-food

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Iraq is effectively threatening to single-handedly affect the world
price of oil. At the June 21 meeting, OPEC members will have to
deal with the threat of increased Iraqi oil production. Whether
Iraq's claim is true or false, it must be dealt with as a
legitimate possibility. A 700,000 bpd increase by Iraq would equal
half of the increase - 1.4 million bpd - that OPEC members agreed
to in March.

But Baghdad is not in control of its own oil shipments. Iraq's
archrival, Iran, controls routes to the Persian Gulf. U.S. Navy
Vice Adm. Charles Moore, coordinator of the U.S.-led Maritime
Interdiction Force, has said that Iran facilitated Iraqi oil
smuggling. Two months ago, Tehran suddenly ceased cooperation and
began seizing tankers. But on June 1, the Iranian regime apparently
resumed its tacit cooperation with smugglers, allowing them to
traverse coastal waters.

Iran has already demonstrated its willingness to use Iraqi
smuggling to its own political benefit, in both relations with OPEC
and with the United States. Iran opposed OPEC's March decision to
increase production and stabilize prices. Tehran began seizing
tankers shortly after the last OPEC meeting, where it withdrew from
the cartel's agreement.

The cartel's success has depended upon forging a strong political
consensus among competing members. Saudi Arabia and Venezuela,
along with non-member Mexico, spearheaded the production cuts of
March 1999 that, in turn, led to the highest oil prices since the
Gulf War. But since Iraq and Iran distanced themselves from the
cartel's March decision, OPEC has begun to fracture. The cartel's
ability to secure consensus has been severely damaged.
For more on the Middle East, see:

Iran will come to Vienna ready to throw its weight around. Iraq
wants to export as much oil as possible - that is a given. But Iran
effectively controls the level of Iraqi exports. Therefore, the
announcement of a potential increase in Iraq's export capacity
effectively gives Iran considerably more influence in negotiations
with OPEC. It allows Tehran to speak with the weight of two
countries' export capacities behind it.

And if Tehran gets its way, as is likely, production increases will
be minimal - and the price of oil will stay high in the months to

(c) 2000 WNI, Inc.
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