The U.N.: oil safeguard?
The United Nations, busy rebuilding the Iraqi oil industry, now plays safeguard to the recovering oil market it helped destroy. Its influence in the oil industry since 1996 has been surreal.
The U.N.'s oil-for-food program helped wreck the oil market in 1997-98. Implemented in May 1996, the program allows export of Iraqi oil despite U.N. sanctions imposed in response to the invasion of Kuwait in 1990. Proceeds, administered by the U.N., go mostly to the purchase of food and medical support for Iraqis.
The agency set a revenue limit on the exports, which it more than doubled to $5.2 billion every 180 days in February 1998. The increase, a diplomatic gesture, was wretchedly timed. Because of the Asian financial collapse, the oil market was contracting. The Organization of Petroleum Exporting Countries had misread the demand slump the preceding November and raised quotas to accommodate existing levels of production. By hiking the revenue ceiling of its humanitarian program, the U.N. in effect dumped Iraqi oil at flush rates into an oversupplied market.
With the market now tentatively recovering, however, the U.N.'s effective liquidation of the Iraqi petroleum resource might prevent an overcorrection.
The recovery is tentative because it depends on unprecedented production discipline within OPEC. Thanks to adherence by members other than Iraq to last April's production agreement, prices of benchmark crudes have spurted to more than $20/bbl. Inventories remain high, however. An untimely production surge would reverse the gains. Yet unbridled price gains will slow demand growth. Warning signs have appeared. U.S. demand has fallen behind last year's levels for distillate and motor gasoline.
OPEC seems unlikely to adjust production before next March. Although the group will meet in Vienna in September, statements by key members show no inclination to tamper with a durable agreement.
Something has to give. Producers learned the hard way in the mid-1980s that kiting the oil price with production restraint costs kiters market share. It also stunts demand growth. But who in OPEC wants to break from quotas that have so quickly restored value to oil?
Price-insensitive Iraqi production might thus save the day. Unlike last year, the market will soon need the oil.
Motivated by revenue for its humanitarian program, the U.N. seems eager to help the Iraqi government meet ambitious targets for oil production: 3 million b/d by next December, 3.2 million b/d by next March, and 3.5 million b/d by December 2000. Last week, Sec. Gen. Kofi Annan hinted that the oil-for-food program will be allowed to collect an extra $1 billion during the 180 days ending Nov. 21. Last June, the U.N. agreed to use $300 million from oil sales to purchase replacement parts for Iraqi oil fields. Those parts should be in place by next March. With investment of about $1.2 billion, say U.N. officials, Iraq might be able to meet the first of its production targets. They are discussing ways to raise the capital from foreign companies.
Oil flow from Iraq thus might increase near the end of the massive inventory draw that will have to occur if OPEC holds the line on production until next March. Prices then might not soar ridiculously, and the market might remain able to grow, which would be best for everyone.
Meanwhile, Saddam Hussein, who raped Kuwait, remains at the head of a boxed-in government in Baghdad. He may not control Iraq's oil money. But he's getting a reconstructed oil industry out of the deal, courtesy of an international agency following program imperatives into uncanny realms. Picture Saddam as chairman and Annan as chief operating officer of a new enterprise called Unoco, short for United Nations Oil Co., destined soon to rescue the oil market from producer confusion.
Have outcomes of warfare, commerce, and international relations ever been stranger?