Guide to Sanctions

[Guide contents & introduction]

10. Why is 'oil for food' suffering a funding crisis?

In the year 2000 Iraqi oil exports averaged more than 1.9 million barrels per day. Between January 2001 and November 2002 Iraqi oil exports have averaged less than 1.5 million barrels per day. This sustained fall in oil exports has plunged the 'oil for food' programme into a funding crisis.

In its November 2002 note on the implementation of the humanitarian programme in Iraq the Office of the Iraq Programme (OIP) reported that there were $3.3 billion of contracts which had been approved, but for which no funds were available. It says that if all contracts currently being processed were approved there would be a funding shortfall in excess of $10 billion. In Phase XII alone between $3.5 billion and $4 billion in revenue has been lost as a result of the reduced level of exports. This underfunding of the 'oil for food' programme prompted Benon Sevan the Executive Director of OIP to tell the Security Council in September 2002 that:

"Irrespective of improvements in procedures, including those recently adopted by the Council in resolution 1409 (2002), without the necessary funds available in the escrow account it will be impossible to implement the humanitarian programme effectively."

Compare this to the situation in November 2000 when the UN Secretary-General was able to report that after the first eight phases the 'oil for food' programme had over $2.5 billion in unspent funds.

Why has there been such a fall in Iraqi oil exports during 2001 and 2002 and what can be done to increase oil sales?

The table below shows the rate of Iraqi oil exports during Phases VI -- XII of the 'oil for food' programme (the cap on the value of Iraqi oil sales was removed 6 days after the start of Phase VII).

	Average rate of oil lifted (millions of barrels per day)
Phase VI	1.93
Phase VII	1.88
Phase VIII	2.14
Phase IX	1.40
Phase X	1.94
Phase XI	1.36
Phase XII (as of 15 November 2002)	1.14

OIP estimates Iraq has a sustainable rate of export of 2.1 million barrels per day.

Source: OIP weekly oil export tables

In its November 2002 report the OIP identifies three reasons for the fall in exports:

1. The periodic suspension of oil exports by Iraq. For instance in April and May 2002 Iraq suspended all oil exports for 30 days in protest at the continuing violence between the Israelis and the Palestinians. The OIP estimates that this resulted in $1.2 billion of lost revenue.
2. Concerns by traders over the reliability of Iraqi oil supplies in the light of previous suspensions of exports and the possibility of an invasion of Iraq in the near future. These concerns have resulted in traders being less willing to buy oil from Iraq.
3. The absence of an agreement between the 661 Committee and the Government of Iraq regarding the pricing of Iraqi oil. The reasons for this and its effects on oil exports are analysed below.

Starting in December 2000 Iraq had been charging below market price for oil bought under the 'oil for food' programme, but then demanding a surcharge of 25-30 cents a barrel from traders. This money was paid directly to the Iraqi government, giving it a source of revenue forbidden by sanctions. In an attempt to end this practice the 661 Committee has sought to ensure the price of Iraqi oil is sufficiently high that traders cannot afford to make additional payments to the Government of Iraq. Since October 2001 they have taken to setting the price 'retroactively' based on average market prices during the previous month.

In an attempt to protect its revenue source the Iraqi government has at times refused to sell oil under this pricing system and losses to the humanitarian programme have been compounded by the reluctance of traders to buy Iraqi oil when faced with reduced profit margins and uncertainty over the price they will pay for the oil. The existence of the surcharge also led to many large oil companies which did not want to be involved in illegal trading refusing to purchase Iraqi oil.

In September 2002 Iraq removed the surcharge, but this has not led to an end to the retroactive pricing system. The Middle East Economic Survey (MEES) reported in October 2002 that Britain and the US had told the 661 Committee that "the strict retroactive pricing system for Iraqi crude exports should continue". According to MEES, "In essence Washington and London want to eliminate name-plate and small trading firms from buying Iraqi oil and re-selling it to third parties and oblige Baghdad to sell to US and UK firms directly, something that Iraq has refused to do".

Attempts by Britain and the US to ensure that only 'credible' oil companies can purchase oil under the 'oil for food' programme can be traced back to the initial 'smart sanctions' discussions of summer 2001. Then a UK draft resolution asked the Secretary-General to draw up: "criteria for the selection of companies and trading organisations to be authorised to handle the sale or supply of Iraqi petroleum ... those criteria to include a proven record of legitimate trading by the company or organisation concerned in Iraqi and non-Iraqi petroleum."

Britain and the US argued that by allowing only reputable companies to purchase Iraqi oil they would prevent Iraq from levying the surcharge. In March 2002 the UN oil overseers concurred that "a more stringent selection of contract-holders" could help to end the surcharge and maximise revenues. No changes to which companies are permitted to trade in Iraqi oil have been made however.

It is not yet clear whether the end of the surcharge will result in a sustained increase in Iraqi oil exports. October 2002 exports averaged 1.61 million barrels per day up from 1.25 million in September and 0.84 million in August, an increase that OIP said was possibly due to the elimination of the surcharge. Whether this trend will continue whilst prices are set retroactively remains to be seen.

Regardless of future developments the 'oil for food' programme now faces a funding crisis, the existence of which provides another example of how sanctions allow the welfare of the Iraqi population to be held hostage to disputes between the Iraqi government and the US and UK. As the Secretary-General warned in his November 2002 report to the Security Council:

"unless the present situation is redressed it is likely that many of the programme achievements to date will be compromised, leading to a worsening of the humanitarian situation."

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