As the price of oil on the international market rose to $30 a barrel on Monday, the authoritative Nicosia-based Middle East Economic Survey (MEES) reported this week that Iraq’s suspension of exports “could be of long duration.”
Iraq’s suspension of exports of 2.27 million barrels of oil a day under the oil-for-food programme cut back the available supply just as Western petrol consumption is about to peak due to the summer holiday season. While Saudi Arabia has expressed willingness to make up for the shortfall, this could take several weeks, pushing up the price still further. Consumers in the US, where the price of petrol is low compared to prices in Europe, would bear the brunt of the rise due to the Iraqi suspension.
Iraq halted exports on June 4th in reaction to an attempt by the US and Britain to impose on the UN Security Council a proposal for “smart sanctions” which would replace the 11-year-old punitive sanctions regime. While Iraq continues to carry on cross-border oil exports to neighbouring countries, involving 300,000 barrels a day, this trade is conducted outside the oil-for-food context and is regarded as “smuggling” by Washington. The US seeks, through “smart sanctions” to end “smuggling” and impose total control on Iraq’s oil exports. Iraqi Deputy Prime Minister Tareq Aziz has warned Jordan, Syria, Turkey and other neighbours who benefit from trade outside the ambit of the oil-for-food programme that Baghdad would cut off oil supplies if these countries go along with Washington’s “smart sanctions” plan.
When the US attempted to get the council to adopt “smart sanctions” at the end of last month ahead of the June 3 renewal of the oil-for-food programme, France, Russia and China balked, claiming they were being rushed into accepting a scheme without careful consideration. The council renewed the oil-for-food programme until July 3 so that the ramifications of the “smart sanctions” scheme could be studied. This plan proposes the imposition of an entirely new regime rather than amendment of the existing sanctions set-up.
According to the Wall Street Journal (cited by MEES), the sticking point in the US plan for “smart sanctions” is a 28-page “goods review list” of items which Iraq would not be permitted to import. This list includes articles “ranging from large-bore [oil] drilling equipment to sophisticated telecommunications gear and fast computers”, MEES writes. Furthermore, this list would supplement two other lists drawn up by Washington which apply to military and dual-use equipment banned for import by Iraq. The existing lists include such items as ambulances, fork lifts and chemicals for water purification, essential to a modern lifestyle.
If the council fails to reach agreement by the beginning of next month, it is expected to extend the oil-for-food programme for another month. In May, Russia proposed a six-month extension to allow for a comprehensive review of the US/UK scheme. Iraq is excluded by the US from these consultations in spite of Jordanian, Russian, French and Chinese appeals for Washington to agree to a dialogue with Baghdad.
MEES says that Iraq “will agree to nothing short of a resolution that lifts the embargo. Failing that, its policy is to continue implementing the oil-for-food Memorandum of Understanding while trying to erode the sanctions [regime] as much as possible”. However, since “smart sanctions” are designed to prevent Iraq from carrying on with this plan, MEES suggests that Baghdad will stop oil exports for an “unpredictable duration until a face-saving compromise is reached.”
There is, so far, no indication that either the Bush administration or Baghdad are prepared for compromise. For the administration, the council’s adoption of “smart sanctions” would amount to a major victory over Iraqi President Saddam Hussein. On the one hand, “smart sanctions” seem to lift the blockade of Iraq. As it is killing 10,000 Iraqi civilians a month the blanket embargo has created a great deal of anti-US feeling in the world, particularly in Arab countries. On the other hand, the expansion of the lists of prohibited items and retention of the system under which all Iraq’s oil revenues are paid into a UN-managed escrow account, in effect, maintain council control over the Iraqi economy.
This means that “smart sanctions” are no smarter than the current “stupid sanctions” regime. Indeed, “smart sanctions” have been designed simply to get the US off the hook of being blamed for cruelty to Iraq’s 22 million people.
While the Bush administration would certainly celebrate the council’s adoption of “smart sanctions” – even an amended version of the scheme – Washington’s jubilation could be short-lived. The US could pay a heavy price for its continuing ostracism of Iraq, particularly if Baghdad sticks by its decision to halt oil exports – which MEES ventures it will. This is because the world is experiencing an energy crunch due to rising demand and falling spare capacity. According to a report on the energy crisis issued by the James Baker Institute for Public Policy at Rice University in Texas, spare capacity stood at only 2 per cent at the end of this winter. A main cause of this lack of spare capacity is the range of US sanctions imposed on Iraq, Iran and Libya, three major regional producers.
These sanctions have not only reduced production, they also prevented the development of proven fields which could increase world supplies of oil. While existing fields can be upgraded to produce more, and new non-Middle Eastern fields can be brought into production, this will take both time and money and could push the price even higher than consumers wish to pay. Furthermore, the alternatives to Middle East oil are not attractive. Central Asian oil is, for example, more expensive to produce than Arab or Iranian oil. And exploitation will take some time.
While the Bush administration battles Congress over whether to extend US unilateral sanctions on Iran and Libya for two years (as the administration proposes) or five (as congressional hardliners demand), there is agreement between the executive and legislative branches on maintaining the embargo on Iraq. This is shortsighted and foolish. Iraq could push output to 3 million barrels a day if it is allowed to repair and upgrade existing fields which are producing at less than capacity because of war damage and sanctions degradation. And if Iraq is permitted to develop new “giant” fields in the south, output could increase by as much as 40 per cent. This means that, given time, Iraqi production could be doubled from the May level of 2.7 million barrels a day. Therefore, by maintaining sanctions on Iraq, the US is punishing not only the hapless Iraqi people but also its own gas guzzlers.