DISADVANTAGE/OIL

LINK: LIFTING SANCTIONS ON IRAQ LOWERS OIL PRICES

ONCE SANCTIONS LIFTED, IRAQ WILL INCREASE PRODUCTION AND DOMINATE

THE MEDDLE EAST

Amy Myers Jaffe and Robert A. Manning January, 2000 / February, 2000 [ AMY MYERS JAFFE, former Senior Economist for Petroleum Intelligence Weekly, directs the Energy Research Program at the James A. Baker III Institute for Public Policy at Rice University. ROBERT A. MANNING is Senior Fellow and Director of Asian Studies at the Council on Foreign Relations and author of the forthcoming The Asian Energy Factor Revisited. ] HEADLINE: The Shocks of a World of Cheap Oil. Foreign Affairs. //LX-NX ARF

Trends in the Middle East also bode well for lower oil prices, particularly as U.S.-led sanctions against Iran, Iraq, and Libya begin to erode. Iraq, with 110 billion barrels in proven reserves, has been held back from tapping them by U.N. sanctions since it invaded Kuwait a decade ago. If sanctions are eased -- after, say, Saddam Hussein is toppled, or the Desert Storm coalition collapses completely -- one can expect to see Iraq's production rates double within five to ten years. And Iraq will not be the only one pumping more in the oilrich Gulf. Iran and Kuwait are also working to reopen their oil sectors to foreign investors, hoping to boost their capacity to pump out oil, their political clout, and their national security. Saudi Arabia is following suit, both to protect its regional prominence and to stimulate its economy. The Royal Dutch/Shell Group recently announced an $ 800 million investment in offshore Iranian oil fields, which could further add to the glut.

CONTINUED SANCTIONS WILL CAUSE A FURTHER CUT IN IRAQI OIL PRODUCTION

The Vancouver Sun, February 14, 2000, HEADLINE: Iraq move could raise price of

oil // lxnx hxm

Its output was about 2.9 million barrels last fall, of which about 2.3 million barrels daily were reserved for exports. Since the start of a new agreement with the UN was reached in

early December, Iraq. has been exporting at about 1.9 million barrels A-day, according to

figures from the United Nations and the oil ministry.

"If the sanctions committee does not quickly approve contracts submitted to it, Iraq will

not be able to continue pumping to the previous levels," Mohammed Mehdi Saleh told the

UN Secretary-General Kofi Annan in Thailand this week, according to the state-ran

newspaper Al-Thawra.

Saleh did not say by how many barrels Iraq would cut its output. Oil Minister Amer

Mohammed Rashid told CNN that a cut of "a quarter million (barrels) or even more" was

possible. The sanctions committee vets contracts under the UN oil-for-food program which allows Iraq to buy food, medicine and essential goods in an exemption to the embargo imposed

after the 1990 invasion of Kuwait. U.S. and British representatives on the committee have

often delayed approval on grounds that certain purchases could have a military use.

The prices of the benchmark North Sea oil hit nine-year highs of $28.20 US a barrel last

week. OPEC is to decide whether its production curbs, imposed last year to raise prices, will be

maintained at a meeting in Vienna next month.

IRAQ HAS CUT ITS OIL PRODUCTION BECAUSE OF SANCTIONS

The Vancouver Sun, February 14, 2000, HEADLINE: Iraq move could raise price of oil // lxnx hxm

Iraq has reduced its oil output and will consider further cuts unless the UN removes its hold on contracts for spare parts, the Iraqi trade minister said in remarks published Sunday.

With world prices rising and supplies being tight, a substantial cut in Iraqi exports could push prices higher if the Organization of Petroleum Exporting Countries continues to restrict the country's production.

ONCE SANCTIONS ARE LIFTED IRAQ WILL INCREASE THE OIL SUPPLY IN THE MARKET

Oil and Gas Journal, August 30, 1999 ("Is There a Change in the Wind Regarding how OPEC will Manage Production in Response to Oil Prices) p. 2 Section- OGJ Newsletter

One proposal has already been floated by Venezuelan Energy and mines Minister Ali Rodriguez: creating a mechanism whereby producers would adjust supply up or down whenever oil prices moved outside a chosen price band. While some OPEC players -- notably heavyweights Venezuela and Saudi Arabia -- support the proposal, MEES contends it is highly improbable that OPEC will agree to boost production immediately at the meeting in response to concerns that rising demand and continued OPEC adherence to output cuts will tighten markets severely this winter. The likelihood is that the cuts will hold to March, as scheduled. The question then remains whether other supply sources come to the fore to ease the looming crunch. The likeliest answer to that question is either: OPEC members unofficially easing up on compliance (what the market used to call cheating) or a continuing buildup in output by Iraq, which ignores its OPEC quota because of U.N. sanctions (see editorial, p. 25).

Meantime. Iraq plans to allow PSCs with foreign companies for developing its oil fields, once U.N. sanctions are lifted.

SANCTIONS WILL CAUSE IRAQ TO DRIVE OIL PRICES UP HIGHER

Winfield, February 15, 2000 (Nicole, Associated Press, February 15, 2000)

Iraq's trade minister, Mohammed Mehdi Saleh, warned this weekend that Baghdad will consider cutting back its oil output even further unless the "holds" on oil spare parts are lifted.

With world oil prices rising and supplies tight, a substantial cut in Iraqi exports could push prices higher if the Organization of Petroleum Exporting Countries continues to restrict its production.

LIFTING SANCTIONS ON IRAQ WILL DRIVE DOWN THE PRICE OF OIL

Ray Joseph Cormier, The Ottawa Citizen, March 13, 2000, HEADLINE: Iraq is key to lowering gas prices // lxnx hxm

The only moderating influence that would stop the OPEC states from artificially forcing prices to rise would be to remove economic sanctions against Iraq. Iraq cannot sell, and other countries buy, its oil. The Western powers now are making their own people bear the burden of sanctions against Iraq.

GULF WAR AND RESULTING SANCTIONS HAVE KEPT IRAQI OIL GLUT OFF THE MARKET

Mideast Mirror, January 5, 2000 HEADLINE: Iraq playing into U.S. hands by rejecting latest UN resolution //ACS-LN-1-23-2000

At the end of the [IRAN-IRAQ] war, which caused immense damage to Iraq's oil industry, the oil ministry drew up a new plan for increasing capacity to some five million barrels daily within a short period by contracting out to petroleum services companies that would be repaid in crude oil. This plan too was shelved after the disastrous invasion of Kuwait and the 1991 Gulf war, which destroyed a great part of Iraq's oil production capacity and resulted in an embargo on Iraqi oil exports.

Thus for some 20 years the Iraqi oil industry has been crippled, even though the country has reserves matching Saudi Arabia's.

THE STATUS QUO KEEPS EXTENSIVE IRAQI OIL OFF THE MARKET

Mideast Mirror, January 5, 2000 HEADLINE: Iraq playing into U.S. hands by rejecting latest UN resolution //ACS-LN-1-23-2000

Maintaining the status quo means the international economic embargo being kept in place, and Iraq relying on the $ 5.26 billion worth of oil it is allowed to sell every six months. Thirty percent of this is deducted for the reparations fund and to cover UN costs, while the rest is put in a UN escrow account over which the Iraqi government has no control in order to pay for imports of food and medicine, as well as up to $ 300 million worth of equipment to Iraq's war -devastated oil production and export facilities.

SANCTIONS ARE CURRENTLY BLOCKING HUGE INVESTMENTS IN EXPANDING IRAQI OIL PRODUCTION

Mideast Mirror, January 5, 2000 HEADLINE: Iraq playing into U.S. hands by rejecting latest UN resolution //ACS-LN-1-23-2000

At the same time, there are signed and unsigned contracts and agreements which the government has concluded with oil companies from France, Russia, China, Italy, Germany, Austria, Malaysia and elsewhere. They cannot be carried out unless the embargo is lifted or suspended, as provided for by the latest Security Council resolution if properly implemented.