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Iraq: Refusal to Export Oil Will Hurt OPEC 31 June 2001 Summary

Iraq halted oil exports June 4 to protest the United Nations' decision to renew the oil-for-food sanctions program for one month instead of the customary six. Iraq's move is not intended to pressure its perennial foes, Britain and the United States, but to scare Iraq's neighbors into rejecting the new U.S-British sanctions proposals. The Iraqi cutoff will reverberate beyond the region and shake OPEC solidarity to the core.

Analysis

Iraq's decision to halt oil exports mirrors similar incidents in 1999 and 2000, when Baghdad engaged in an on-again, off-again export reduction-and-suspension program that kept the oil markets off balance for several months. But while prices did edge higher, they did not skyrocket.

They will rise even less this time around. The Organization of Petroleum Exporting Countries has enough spare capacity to cover any Iraqi shortfall, and Iraq's actions won't affect U.S. pump prices either. High gasoline prices result from inadequate refinery capacity and low stocks; for now, crude supplies remain adequate.

Instead of targeting Britain and the United States directly, Baghdad is instead taking aim at a new U.K.-U.S. sanctions proposal by placing pressure on its Arab neighbors. The two Western states are advocating an alternate sanctions regime that would more specifically target the Iraqi government. The United Nations may be forced to make the new proposals possible, and OPEC will experience heavy damage to its solidarity.

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Under current sanctions, Iraq's oil income flows into a U.N.-managed fund from which each withdrawal must be approved to prevent Iraq from purchasing military supplies. The new "smart sanctions" regime would allow Iraq unrestricted trade in all civilian goods but would impose stringent restrictions on military-use goods. The new system would require close cooperation with three states that border Iraq, Jordan, Syria and Turkey, to allow close monitoring of Baghdad's imports.

These states are the true targets of the Iraqi cutoff. Jordan gets virtually all of its oil from Iraq, and while Iraq says that for now it will continue exporting to Jordan, Amman can't help but be nervous about its twitchy neighbor. Syria, after 20 years of harsh relations, managed only last year to reopen an Iraqi pipeline to supply its refineries; that line is now under threat. And before the Persian Gulf War, 1.5 million barrels of Iraqi oil flowed each day through a pipeline that crossed Turkish territory to the Mediterranean port of Dortyol.

The post-Gulf War sanctions regime locked down the pipeline, depriving Turkey of billions in transit income. Like the Syrian line, regular use of the Dortyol line resumed only last year when spiraling crude prices prompted the United Nations to allow Iraq to export as much oil as it wanted. Iraq ceased using that line June 4.

The oil threat is one Iraq can hold over its neighbors' heads for some time. The oil-for-food fund is overflowing with petrodollars after the United Nations lifted export restrictions last year. And Iraq isn't canceling all of its exports -- just the U.N.-monitored ones. Smuggling by tanker and truck, to the tune of 800,000 barrels per day, continues uninterrupted. Income from these activities flows directly to Baghdad, circumventing the United Nations.

If the United Nations is going to get local support for its smart sanctions policy, it must first offer something to Jordan, Syria and Turkey to outweigh the damage Iraq can cause.

Turkey's demands will be simple but expensive. Turkey is in the midst of an economic crisis, and needs cash, whether it be in the form of IMF loans or debt forgiveness. Jordan and Syria's requirements are much more politically sensitive; Washington may need to moderate its support of the Sharon government in Israel. Washington may find this price tag too high, and smart sanctions will have substantial holes if they even work at all.

Iraq's export cutoff will have an impact beyond just annoying the West and scaring its neighbors. Although Iraq is one of 11 OPEC members, while it is bound by U.N. sanctions, it can produce as much oil as it wants. So from the viewpoint of certain OPEC members, the cutoff, which will remove 2.2 million barrels per day from global supply, provides a hard-to-resist opportunity to increase oil prices.

At the June 5 OPEC summit, some OPEC members, particularly Venezuela, which has made no secret of its desire to send prices as high as possible, will want to leave production steady. Others, such as Saudi Arabia, will argue for a production increase.

Those wanting an increase will win this round. Saudi Arabia has enough spare production to single-handedly replace Iraqi oil, and stepping into the void would ingratiate the Kingdom with its security guarantor, Washington. There are already hints that Saudi production is on the uptick. Others will go along with Riyadh so that it doesn't glean all of the extra profits.

But the damage to OPEC solidarity is already done. The Iraqi cutoff has OPEC members second-guessing each other. All have a bit of excess capacity, and all know they will pump more to take advantage of Iraq's withdrawal regardless of the official OPEC stance. This unraveling of confidence will continue as oil prices drop in reaction to the developing global economic slowdown, darkening OPEC's collective future. For if OPEC members cannot cooperate at a time when none are threatened economically, they will find it that much harder to engineer production cuts once prices truly fall.

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-- Martin Thompson (mthom1927@aol.com), June 05, 2001