Iraq reluctantly accepts renewed U.N. deal

Iraq has accepted a renewal of the oil-for-aid deal with the United Nations, but only after a delay of 4 days as Baghdad protested against delays in the aid approval process.

The agreement means Iraq will sell another $2 billion worth of oil on international markets over the next 6 months, using the income to pay for humanitarian aid for Iraqi civilians.

The U.N. Security Council agreed to renew the existing deal on Dec. 4, despite pleas from humanitarian agencies for an increase in exports allowed under the scheme.

U.N. Sec. Gen. Kofi Annan reportedly told U.N. Security Council members that funds provided under the current deal are "insufficient to address, even as a temporary measure, all the humanitarian needs of the Iraqi people."

After the U.N. approved renewal of the program, Iraq at first suspended exports. Baghdad complained of problems with the mechanism for deciding which projects or causes receive aid.

Saddam's motives

Julian Lee, oil analyst at London's Centre for Global Energy Studies (CGES), told OGJ that opinion was divided over President Saddam Hussein's motives for initially rejecting the renewed deal.

"One view," said Lee, "is that Saddam can live without oil exports and saw this as a way of provoking a crisis in humanitarian aid, as a means of driving a wedge between the China/Russia/France and U.S./U.K. factions within the U.N.

"Another view is that Saddam needs the oil exports and wished to force a change in the mechanism for aid distribution. This certainly requires changing at the moment.

"Approvals for purchase of supplies have been very slow. Things have been getting blocked. This is down to the U.S. representative on the sanctions committee, who takes an inordinate amount of time to approve purchases or blocks them altogether."

Oil prices fall

In the period between U.N. renewal of the program and Iraq's acceptance, the price of crude oil rallied following the earlier announcement of a new Organization of Petroleum Exporting Countries production ceiling (OGJ, Dec. 8, 1997, p. 21).

When the U.N. renewed the deal, Brent crude for January delivery fell 15¢ on the day to close at $18.03/bbl on Dec. 4. By the time Iraq agreed to resume exports Dec. 8, January Brent had bounced back to $18.15/bbl but plunged at $17.42/bbl on Dec. 10.

Now that OPEC output is expected to increase and Iraqi oil exports appear guaranteed to contribute to an expected oversupply of crude oil, CGES predictions of an oil price decline look likely.