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By William Drozdiak
Washington Post Foreign Service
Tuesday, June 5, 2001; Page E01

BRUSSELS, June 4 -- Iraq suspended nearly all crude oil exports today and insisted it would not resume supplying more than 2 million barrels a day to the world market until the United Nations abandons a new plan to shore up sanctions against Saddam Hussein's regime.

Iraq's decision to challenge a British proposal, backed by the United States, to overhaul U.N. sanctions against Baghdad caused oil prices to surge above $29 a barrel and created additional pressures on OPEC oil ministers to consider a production increase at their meeting Tuesday in Vienna.

Ali Rodriguez, secretary general of the Organization of Petroleum Exporting Countries, said the ministers would study the consequences of the Iraqi stoppage -- which removes about 5 percent of the world's oil exports from the market -- but emphasized that the 11-nation cartel saw no urgent need to boost output. "For the time being, the supplies are sufficient for demand," he said.

Saudi Arabia, the world's largest oil exporter and the only OPEC member with enough excess capacity to make up a shortfall, said it was prepared to increase production, but only if it proves necessary.

"What concerns us is the stability of the market," said Saudi Oil Minister Ali Nuaimi. "This is not the kingdom's position, but OPEC's position, which is to fill any shortage in the oil market."

The timing of Iraq's action seems designed to maximize the impact on the global economy as the United States, Japan and Europe struggle to cope with a sharp downturn in growth -- in part because oil prices have nearly tripled over the past two years.

It also comes at the start of the vacation season in the United States and Europe, when many people take long car trips. Gasoline prices have been rising to record levels recently due to a combination of factors, including a shortage of refinery capacity in the United States, high taxes in Europe and two production cuts by OPEC countries this year that have pushed up crude oil prices.

Oil traders in Europe confirmed that Iraq ceased all deliveries early today at its Persian Gulf port terminal of al-Bakr and through a pipeline running across Turkey to the Mediterranean port of Ceyhan. Iraq's oil minister, Amir Mohammad Rasheed, said his country would continue delivering about 300,000 barrels of crude daily to its neighbors Turkey, Jordan and Syria as long as they refrain from supporting the new sanctions plan.

Last week the U.N. Security Council agreed to extend by one month -- rather than the usual six months -- an existing oil-for-food program that governs the way Iraq can sell its oil. Under that program, Iraq is allowed to export about 2.3 million barrels a day and can use the earnings -- which are placed in a special escrow account -- to purchase food and medicine.

By next month, the United States and Britain hope to persuade their fellow permanent members on the Security Council -- Russia, France and China -- to endorse a package of "smart" sanctions that would allow the free flow of civilian goods to Iraq but clamp down tightly on a list of proscribed items that could be used for military purposes.

The new plan would allow commercial and cargo flights into and out of Iraq as long as they are closely inspected. It would also require much tighter monitoring of Iraq's borders to prevent illegal smuggling, including oil supplies that are not subjected to U.N. control.

Iraq officials are particularly incensed about the last measure, which threatens to interrupt lucrative illicit trading across its borders that has funneled almost $2 billion a year in cash directly into Saddam's pockets. The United States has promised to compensate Turkey, Jordan and Syria for any cutoff in Iraqi oil supplies in exchange for their cooperation on the new sanctions program.

Rasheed said Iraq would suspend oil exports until the Security Council abandons its amended proposal and agrees to the usual six-month extension of the food-for-oil program. Iraq now holds about $12 billion in its escrow account under the existing program, far more than necessary to ensure adequate food supplies. But U.S. and British diplomats contend that the biggest problem is the huge trafficking in smuggled oil that provides critical financial support for Saddam's regime.

In the past, Iraq's sporadic oil stoppages have not lasted long enough to seriously disrupt the global energy market. For that reason, many OPEC ministers have taken a relaxed attitude to the latest cutoff, saying they want to wait to see whether there are any market repercussions.

"Whenever there is a cut in supplies, for any reason, be it political or as the result of a natural disaster, we will work for stability in the market, a balance between supply and demand and a stable price for the interests of consumers and producers," said Nuaimi, who visited Washington in April to assure the Bush administration that Saudi Arabia would play its traditional role as swing producer to prevent volatility in oil markets.

Even a temporary cut in oil flow at this time, however, could have a powerful impact because of the fragile state of the world economy. Higher oil prices have weighed heavily on consumer nations' prospects for growth. It has also caused inflationary pressures to rise, particularly in Europe, where the weak euro means oil is more expensive because it is paid for in dollars.

"It really depends on how long it goes on and what kind of impact it has on the market," said Nigeria's oil minister, Rilwanu Lukman. "Last time it didn't go on for very long and we did not need to do anything. If the market calls for it, we will increase production. But right now, we don't feel we need to do anything."

Leo Drollas, a market analyst for London's Center for Global Energy Studies, said OPEC fears that any rash moves could quickly lead to a worldwide oversupply of oil that could rapidly drive down prices. "They can wait perhaps another month before they have to worry about the autumn," he said. "They don't want to get caught if they raise output now and then be forced to cut back if and when Iraq's oil comes back into the market."

In addition, President Bush appears to be taking a more hands-off approach toward OPEC's policy decisions than the Clinton administration, which often tried to pressure the cartel to raise production and bring down prices.

Analysts point out that Bush's new energy program states that oil prices must stay above $20 a barrel for oil companies to have sufficient profit incentive to invest in new exploration and drilling projects.

From Britannica:

Introduction to Saudi Arabia

History of Saudi Arabia

Cultural Life in Saudi Arabia

Introduction to Iraq

History of Iraq

Britannica Home Page