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Iraq: Baghdad Deploys Oil As Weapon To Influence UN

Iraq's decision to suspend cooperation with the oil-for-food program is pushing world oil prices upward, and demonstrating Baghdad's ability to use oil as a negotiating card in its conflict with the United Nations.

Prague, 23 November 1999 (RFE/RL) -- Iraq converted its oil exports into a diplomatic weapon this week as it refused to accept an interim two-week extension of the UN oil-for-food program.

The refusal came as the five permanent members of the UN Security Council hold intense discussions aimed at agreeing on a new strategy for pressing Iraq to allow the return of arms inspectors in return for suspending sanctions. The Security Council decided this weekend to extend the oil-for-food program for two weeks beyond its just-completed current phase in an effort to gain more time to reach a consensus.

Analysts say that Baghdad's refusal to cooperate now raises the stakes of the Security Council debate. Iraq is sticking to its hardline position, refusing to allow any weapons inspections unless sanctions end completely. By demonstrating that it is not in a compromising mood, Baghdad may hope to make it difficult for the two Security Council members most sympathetic to its position -- Russia and China -- to agree with any plan backed by the other three -- the United States, Britain, and France -- that falls short of that.

At the same time, Baghdad's refusal to cooperate puts economic pressure on the Western powers to make concessions. Iraq's announcement yesterday that it is cutting off its oil exports under the oil-for-food program immediately pushed up benchmark global oil prices to almost $26 a barrel. That is the highest level since January 1991.

Leo Drollas, an oil market expert at the Center for Global Energy Studies in London, told RFE/RL by telephone that the Iraqi export cutoff has had a dramatic effect on oil prices because the oil market already is facing supply shortages as winter approaches. Leo Drollas:

"The market has been tight ... because of the cuts OPEC instituted in March this year, and we are going into a winter quarter with declining stock cover in a number of oil products. So this has come on top of a tightening market and has made things worse. Iraqi exports, at 2.2 million barrels a day, represent 3 percent of global consumption in the fourth quarter, so it is a significant amount of oil that has been withdrawn."

Drollas estimates that the Iraqi cutback decision added almost a dollar to the cost of a barrel of oil. That would represent a 4 percent hike in the price of oil over the course of a single day.

Such an ability to influence the oil market gives Iraqi President Saddam Hussein a potent diplomatic weapon with which to influence the course of the UN Security Council talks. Drollas says:

"There are, of course, severe economic ramifications of very high oil prices, and it is not doing much good to the world economy. Already inflation is creeping up in many developed countries, and it certainly is not doing very much good for the far eastern economies which are recovering now from the deep recession they went into. So increasing the price of oil to very high levels by recent standards ... reduces the growth rates of these countries."

While higher oil prices are likely to put pressure on Western governments -- which take a harder line on Iraq -- they will not disturb Russia, which is considered the most sympathetic to Iraq of the permanent Security Council members.

"Russia is a large exporter of oil and gas, and gas prices are linked to oil, so the actual net effect on the Russian economy is positive, because Russia is extremely dependent on foreign exchange earnings and its main exports are oil and gas. So Russia will benefit from higher oil prices and is benefiting."

But Saddam's strategy is likely to hurt China, which is sympathetic to lifting sanctions on Iraq but has not so far played a large role in the Security Council discussions. Drollas says that China is increasingly becoming an importer of oil and will not welcome the higher prices.

The Iraqi decision to cut off its oil exports now pits Baghdad against the West in a waiting game to see which side can outlast the fallout the longest without compromising. The pressure on the West of higher oil prices is mirrored in Baghdad by the pressure of cutting off its own oil revenues with which to buy humanitarian supplies.

Ironically, it was a decision by the UN Security Council to increase the amount of money at Baghdad's disposal in the latest phase of the oil-for-food program which may have given Baghdad its ability to now deploy oil as a diplomatic weapon.

During the last phase of the program, Iraq was supposed to export only $5.26 billion worth of oil. To stay below that ceiling, Iraq ordinarily would have had to cut back its production this summer as OPEC actions raised the per barrel price of oil.

Instead, the Security Council agreed over the last six months to let Baghdad maintain its originally planned level of production, allowing Iraq to reap a windfall profit as oil prices rose. The Security Council agreed to do so because Baghdad has fallen short of earning its full allowances under past phases of the oil-for-food program.

Analysts say Iraq's windfall earned it as much as $2 billion. And that has given Baghdad a surplus it now can use to try to outlast the West in the latest showdown over the UN's Iraq policy.