A Gulf Crisis Once Again With Saddam Seeking 3-Phase Confrontation:.

*** For The 1st Time In Petroleum History, The EU Consumers Are Protesting High Taxation On Fuel Which Exposes Rich Govts.

*** OPEC Website www.opec.org Explains How And Where In The World Fuels Are Being Overtaxed

*** The Saudis Will Be Very Embarrassed If The US Leaks Out That They Have Put More Oil On The Market To Prevent Prices From Skyrocketing In The Event Of Confrontation With Iraq

NICOSIA - President Saddam Hussein of Iraq is said to be inviting the US to a three-phase confrontation in which high-priced petroleum will loom large over the world economy. Whether or not he is miscalculating once again will only be known at the end of phase three. The developments between Baghdad and Washington can be summarised in the following order:

1. The Iraqi Scenario: According to a well-informed Iraqi source, Saddam Hussein is activating a scenario for confrontation with the US.

Phase 1 - US-UK Attack On Iraq: Under the scenario, the first phase would be a series of provocative acts which would lead to a combined US-UK attack on Iraq, much more intense than the sporadic air strikes of recent months. Provocations could be seen to include the recent incursion of an Iraqi jet into Saudi airspace, for the first time in more than a decade. Iraq has stepped up the accusation, reminiscent of early 1990, that Kuwait is stealing oil from a field on their common border. Speaking on Sept. 14, Iraqi Oil Minister Gen. Amir Mohammed Rashid added that "Iraq will take suitable measures which will guarantee its and the other Arab nations' rights to control its oil wealth and employ it in the interest of the whole Arab nation rather than achieve vicious American policy".

The Iraqi moves are clearly timed to coincide with (a) the UN Millennium Summit which involved the gathering in one city of over 150 heads of state, (b) the US presidential elections in which the Iraq factor has so far not had a noticeable influence, and (c) the sharp rise in oil prices which has disrupted economies throughout Europe but left the US relatively untouched. Whether Iraqi attempts to draw the US into a confrontation will continue, and whether the US will accept that challenge, remains to be seen. US Secretary of State Madeleine Albright has warned that if Iraq rebuilds its weapons of mass destruction or crosses US "red lines" in any other way, it would risk an American attack.

Phase 2 - Threaten To Stop Oil Exports: If the US does attack, however, the source believes Saddam will move into the next phase of the scenario, which would be to threaten to stop oil exports. The attack itself, even if it does not target oil facilities, would be sufficient to send the oil price to higher levels. A direct Iraqi threat to stop exporting would have a stronger impact. In fact, Gen. Rashid's statements that Kuwait was stealing Iraqi oil had already sent prices higher, which benefits Iraq.

Baghdad has nothing to lose by forcing a higher price through belligerent statements. High oil prices have allowed a de-facto relaxation of the financial stranglehold imposed by the UN sanctions on the country - both by generating higher smuggling revenues as well as monies through the oil-for-food programme. It is estimated that Iraqi oil revenues currently amount to $16-20 billion.

On the other hand, Iraq is also trying to pressure the oil producers of the Gulf Co-operation Council (GCC) by saying that it would boost production to lower prices. On Sept. 15, 'Al Rai Al Aam' quoted Kuwaiti Oil Minister Shaikh Saud Al Nasser Al Sabah as saying: "Iraq has two positions...Inside OPEC, it threatens to raise output and that it has the capacity to reach three million b/d. Our response was 'good for you' if you can reach three million. At the same time, Iraq (publicly) threatens that it would stop its oil production, I do not know which stand to believe" (see how the prevailing oil market conditions fit the Iraqi scenario in APS Review's Oil Market Trends, No. 12, pg 3-4).

Phase 3 - Mobilise Russia, China & France: The next phase under the Iraqi scenario, the source says, would be to mobilise the help of the three permanent members of the UN Security Council whose support for the sanctions regime is decreasing steadily - i.e. Moscow, Paris and Beijing. Russia is stepping up its pressure for the lifting of sanctions. Russia issued a subtle challenge to the sanctions regime on Sept. 17, when a team of Russian officials arrived in Baghdad by air apparently in violation of the UN embargo. Observers noted that the sanctions regime against Libya crumbled by mid-1999 after several African leaders violated the UN air embargo. In a recent letter to UN Secretary General Kofi Annan, Russian Foreign Minister Igor Ivanov complained that Moscow was coming under intense pressure from its parliament as well as other diverse interests to resume business with Iraq.

French President Jacques Chirac said in early September: "We consider this sanctions policy is dangerous, inhuman and inappropriate". UN officials are said to have quietly hinted approval for the development of the Iraqi oilfields of Majnoon and Ratawi. On Aug. 18, the UN Sub-commission on the Protection and Promotion of Human Rights, composed of experts named by their governments, issued an appeal for the lifting of sanctions against Iraq. A report to the panel by a Belgian law professor, Marc Bossuyt, said the sanctions were "unequivocally illegal". Baghdad sees such developments as confirming its belief that sanctions will eventually crumble by themselves.

2. The US Options: The options facing the Americans in such a scenario include:

(1) hit Iraq with a massive air assault, (2) mitigate the oil price rise by releasing oil from the 570 million barrel US Strategic Petroleum Reserve and heating oil stockpile of 2m b/d (see OMT 12), and (3) get the GCC states to raise production to levels high enough to cancel out the impact of Iraqi non-production. The US is ready for Phase 1 of the Iraqi scenario, and is uncomfortable with Phase 2, but it prefers not to let things deteriorate to the level of Phase 3 - especially in the election season. Iraq is well aware of this.

For the GCC states, all this will be very embarrassing. There is considerable public sympathy in the Arab World for the suffering of the Iraqi people, as well as a hidden sense of satisfaction at the way Saddam is withstanding the West. Neither Saudi Arabia nor the UAE, which are the only ones in the GCC with excess capacity, would like to be in the midst of another Iraq-US confrontation. They might get some help from Algeria and Qatar, which have limited excess capacity as well. Apart from the question of public opinion, there is also the fact that none of these states would like to go against the current OPEC production discipline which they took considerable trouble to put in place since early 1999.

Washington's options at present are far more complex than they were in 1990, the source says, pointing out that the US and the UK have squandered goodwill within the Security Council by refusing to acknowledge the conciliatory approach towards Iraq preferred by Russia, France and China. The source adds that, therefore, the possibility of unanimity within the Security Council for a military strike is very limited, let alone the prospects of forming a huge Western and Arab/Islamic coalition against Iraq as in 1990. Nor will the US political scene allow the dispatch of ground troops into Iraq to remove Saddam. This leaves Washington with only one real military option: intensifying air strikes. Baghdad is betting that will only weaken the sanctions regime, disturb the world oil market further, and strengthen Saddam's image within the Arab World.