Fallout from U.N./Iraq deal

David Knott
London
[email protected]

U.N. Sec. Gen. Kofi Annan has prevented war between the U.S. and Iraq-at least for now-but triggered an oil crisis.

Annan brokered a difficult deal over inspection of Iraqi weapons stores, which will in theory enable cataloging of President Saddam Hussein's weapons of mass destruction to continue.

Crucially, in return for Saddam allowing inspections once more, the U.N. has apparently promised that sanctions against Iraq will eventually be lifted if Baghdad complies with U.N. Security Council resolutions.

The agreement is reportedly vague in many places, and governments are reading the small print suspiciously before they sign. Meanwhile U.S. and British forces in the Persian Gulf area will be kept on standby.

In crude oil markets traders greeted the news by slashing prices. Brent crude for prompt delivery fell 45¢/ bbl on Feb. 23 to close at $13.48/bbl, while Brent crude for April delivery fell 66¢/bbl to $14.21/bbl.

Bad news

Leo Drollas, chief economist at London's Centre for Global Energy Studies, said the deal was bad news for the oil industry: "We're in crisis!"

Drollas noted that the agreement is open to differing interpretations, which could prove a problem. Also, he pointed out that Saddam is not only devious but once tore up a peace agreement with Iran on live television.

"I think OPEC will make a move," said Drollas. "Otherwise, the market will be like a train running out of control, hurtling into oblivion.

"The train has already crashed through the $14/bbl buffer, and now it's heading for $13/bbl. The Saudis are already making noises, because they're hurting like hell. The Venezuelans are hurting too, but they won't act, because of a policy vacuum."

What's next

Drollas predicts that Brent crude's passing through the $13/bbl buffer will rouse OPEC to action: "Thirteen dollars per barrel is bad; $12/bbl is the limit."

OPEC is currently producing 28.3 million b/d, said Drollas, while the call on OPEC is only 26.5 million b/d and refiners are building stocks-highly unusual at this time of year.

"If worldwide crude oil production carries on for the rest of the year without cutbacks," said Drollas, "we could have a repeat of 1986. Prices could crash below $10/bbl.

"But this won't happen. OPEC members in extremis will gather together and hold hands. A cut across the board by some percentage is what they should do, returning to quotas when the crisis is over."

Meanwhile Middle East leaders are assessing how the deal will affect their own situations. For example, Israel's Prime Minister Benjamin Netanyahu says the deal amounts only to postponement of regional conflict.

Saddam's position in the Arab world has apparently risen. Regarding Annan's concession that sanctions will ultimately be lifted, a diplomat reportedly said: "There you have it-rehabilitation of Saddam Hussein."

For President Clinton, the U.N./ Iraq deal brings the Monica Lewinsky case back to top of the problems list. One U.S. senator reportedly said about the unexpected reshuffling of priorities: "I was worried that this initiative by Annan was going to put the president in a box, and that's exactly what has happened."