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A useful distraction.

The oil markets are worried about Iraq being allowed to resume exports. Prices have reacted to the prospect with exaggerated volatility. But if Iraq is permitted to sell oil under strict supervision, the result may be salutary in focusing attention on Opec's more fundamental differences.

Opec is in disarray again. It faces the possibility that the United Nations will allow Iraq to resume limited exports of oil in recognition of its improved compliance with UN requirements for the lifting of sanctions.

If this happens, under UN Security Council Resolutions 706 and 712 Iraq would be allowed to ship oil worth $1.6bn over a six-month period, amounting to some 500,000 b/d. Given that oil prices have declined steadily in the three years since Iraq has been obliged to cease selling oil abroad - and in the meantime Opec members have been lax in observing their self-imposed production quotas - the return of Iraqi oil to the markets should have a devastating effect on prices.

That, at least, is how the markets have reacted to on-again and off-again speculation surrounding Iraq's talks with the United Nations. But the sudden swings in oil prices in July and early August are more a reflection of market uncertainty than the simple impact of an extra 500,000 b/d being made available.

First, it is worth noting that any resumed Iraqi exports are now likely to be very strictly supervised. Whatever else President Clinton's decision to bombard Iraq with cruise missiles in June has demonstrated, it constituted a clear signal that the United States would not allow Saddam Hussein to sneak back into international respectability through negligence.

Such determination may not hold (and if it does not there are potentially appalling implications for Iraqi rearmament - see page 14). But the UN's decision to permit to start selling oil again will be perceived as the most important test of its resolve since the end of the Kuwait war. The quantity of oil it exports will be closely monitored and the use to which it puts the revenues from the sales (destined under UN rules for purely humanitarian purposes) will be scrupulously controlled.

Hitherto, the mere prospect of renewed Iraqi exports has acted as a wild card in the market's price calculations. Once it is officially sanctioned and supervised, however, the amount of Iraqi oil returning to the market (in effect, its Opec quota) will be fixed.

For the sake of shoring up internal stability, Iraq may yet go further in complying with UN demands. The oil income is desperately needed, even if its disbursement is effectively overseen by the United Nations. Out of the $1.6bn earned from the oil exports, the UN will organise the purchase of food and medicine while retaining 30% as compensation for Kuwaiti victims of the 1990 invasion and as war reparations. Iraq, in other words, will be neither in charge of its export levels nor the manner in which it employs the income.

This win make it all the more important that the rest of Opec sets it house in order and observes individual output levels agreed at regular ministerial meetings Iraq's 500,000 b/d can be absorbed if Opec displays the discipline and cohesion which in recent years has largely eluded it.

Contrary to received wisdom, therefore, there is a possibility (no more, however) that an agreement to allow Iraq to return to the markets win force Opec into shape. The prospect has already proved divisive.

The official ceiling for Opec output currently is 23.6m b/d. Total production in July was reported at 24.6m b/d, and may rise to 25m b/d in September. If prices are far lower than hoped for (at $16-$17 a barrel rather than Opec's notional target of $21 a barrel), it has less to do with the threat of Iraqi production than other members' consistent failure to abide by their allocation pledges.

At present, Kuwait is most prominently out of line. At the last full-scale Opec conference held in Geneva in June, Ahmed Ali al Baghh, the Kuwaiti oil minister, Ali al Baghh, insisted that his country should be granted an allocation of 2.16m b/d compared with the existing 1.6m b/d.

Jean Ping of Gabon, Opec's president, shuttled between the oil producers' capitals and tried fruitlessly in July to arrange an emergency meeting of the organisation's ministers to cope with the apparently imminent threat of Iraq's reappearance as an exporter. The fact that his efforts ran aground indicates that Opec's problems run deeper than any role Iraq may play in the future. He claimed after returning to Gabon that several members had wanted to arrange an emergency meeting regardless of whether Iraq resumed exports. Gholamreza Aqazadeh, the Iranian oil minister, for example said that an immediate meeting of the cartel was necessary to deal with the volatility of prices.

Hisham Nazer, his Saudi counterpart, argued that a conference would be pointless unless some kind of consensus had been reached in advance Both sides had a point. The reasons for the low level of prices extend far beyond the prospect of Iraqi production and need to be addressed urgently. On the other, ill-prepared Opec conferences such as the last in Geneva end up in irresolute bickering.

At the heart of Iran's objections is Saudi Arabia insistence on producing at least 8m b/d, regardless of the effect on prices. Riyadh is determined to underline its refusal ever again to act as Opec's swing producer, whereby it adjusted its own output to influence prices and left its associates in the organisation (and other world producers) to change their exports at will.

The depth of Iranian vehemence was displayed by an editorial published in the Tehran Times in July. "The excuse for Saudi Arabia's demand for a higher production share [to Jean Ping] was apparently the great financial need to compensate for the losses that country had sustained during the war [over Kuwait]," paper said, going on to draw a comparison with the devastation wrought by Iraq in its war against Iran.

"Saudi Arabia had only borne the expenses of the deployment of troops and military equipment by the Western countries," the Tehran Times continued. "Before the outbreak of the war, Saudi Arabian oil production was below five million barrels per day, and there is no justification for that country's present rate of daily production of eight million barrels. The Saudi Arabian surplus production only serves to impose an articifically low price on the petroleum market and it is nothing short of making a free gift of the oil producing nation's rightful incomes to the big Western countries."

The Saudi response was typically more measured in tone. Hisham Nazer was quoted by the official Saudi press agency as saying that Iran's accusations were merely a smokescreen for allowing it to produce more than its Opec quota. Nazer cited Opec's own production and pricing monitoring committee as bringing Iran's persistent excess output to the attention of organisation's June meeting in Geneva. "Iran should endure alone the repercussions of the collapse of oil prices."

The war of words emphasises the political as well as economic implications of the dispute between Saudi Arabia and Iran. Equally clearly, it highlights the fact that Iraq's feared 500,000 b/d of exports is only a subsidiary element in Opec's problems.
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Title Annotation:possibility of oil export sanction to Iraq threatens Opec
Publication:The Middle East
Date:Sep 1, 1993
Previous Article:Hanging on to heritage.
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