Oil for Food : Iraqi Exports Would Feed Hungry, but Traders Are Wary

By PATRICK LEE

Feb. 10, 1996 12 AM PT

TIMES STAFF WRITER

As Iraq and the United Nations resume their talks Monday on a partial lifting of the 5-year-old ban on that nation’s oil exports, hope and fear are mounting that oil prices could be driven down drastically once Iraqi crude washes back onto the market.

Iraq and the U.N. are discussing conditions that would allow the beleaguered nation to sell $2 billion worth of crude oil over six months, with the proceeds going to buy much-needed food and medical supplies.

At current prices, that would mean the introduction of as much as 800,000 barrels of oil a day into world markets, roughly as much oil as the nation of Algeria now produces under its OPEC quota, analysts said.

That could cause crude oil prices to drop immediately by as much as $2 to $4 a barrel from their current level of $17 to $18 a barrel--a blow to oil producers but good news on the inflation front. It could cause gasoline prices to drop several cents a gallon at the pump.

“That is more than 1% of total world oil production,” said John H. Lichtblau, chairman of the Petroleum Industry Research Foundation Inc. in New York. “When that suddenly comes onto the market, it’s going to bring the price of oil down, there’s no question about it.”

Price instability is built in because “the more prices fall, the more oil Iraq has to sell to achieve the [$2] billion, and the more it sells, the more prices fall. . . . It’s a spiral,” said Vahan Zanoyan, senior director of Petroleum Finance Co. in Washington.

Oil markets are already showing signs of worry. The price of light, sweet crude oil for March delivery has been holding at about $17.75 a barrel for the last couple of days, despite a report Tuesday by the American Petroleum Institute that U.S. inventories of crude oil fell unexpectedly the week before by 2.03 million barrels, to 305.4 million barrels.

In normal times, such a decline would send prices up near $20, brokers said. But the anticipation of Iraqi oil entering the market has kept prices low.

“I think everyone is apprehensive,” said Lee Taylor, a futures broker at Dean Witter in New York.

Iraqi oil could flow in as soon as 90 days after an agreement is reached with the U.N., said Fereidun Fesharaki, director of the resources program at the East-West Center in Honolulu. “That would be about the start of the summer season, when demand for oil is low. It’s not the best time.”

A precipitous drop in world oil prices could seriously affect oil company revenues and damage oil-dependent economies, including those of U.S. oil patches such as California, Texas, Louisiana, Oklahoma and Alaska. It would also pressure the Organization of Petroleum Exporting Countries to curtail its own production levels to stabilize prices, something it hasn’t had the discipline to do in recent years.

But a drop of $2 to $4 a barrel would also translate into a decline of several cents a gallon at the gasoline pump, and create a windfall for energy-intensive businesses.

Iraq, once one of the world’s largest producers of crude oil, was banned from exporting its economic lifeblood after it invaded Kuwait in August 1990. Its proven reserves are second only to those of Saudia Arabia.

Iraqi leader Saddam Hussein has previously rejected U.N. resolutions that would have allowed limited oil sales for humanitarian purposes, arguing that strict restrictions on the sale would infringe on Iraq’s sovereignty.

But Iraq came back to the table this week to discuss a resolution that would allow the sale of $1 billion worth of oil every 90 days for an initial 180-day period, with funds going to buy food and humanitarian goods, defray the costs of U.N. monitoring operations and to finance war reparations to Kuwait.

An influx of Iraqi oil could, of course, change the current balance of supply and demand. The oil market has been growing at a rate of 2% this year, or about 1.4 million barrels per day, said Daniel Yergin, president of Cambridge Energy Research Associates in Massachusetts and author of “The Prize,” a history of the oil industry. Iraq’s oil would supply more than half of that expected growth in demand.

But analysts doubt OPEC’s ability to agree on quota reductions, let alone adhere to them. Already nations such as Venezuela, Algeria and Nigeria are producing oil at rates above their assigned quotas.

Said Philip Verleger Jr., a petroleum economist with Charles River Associates in Washington: “There will be attempts to cut [production], but they won’t last, and no one will believe it, and prices will go back down. Prices could get to single-digit levels, and they’ll swing like a needle on a seismometer during an earthquake.”

Complicating the matter is the rise in non-OPEC oil production. Analysts forecast that non-OPEC nations this year could produce as much as 2 million barrels a day more than last year, further lessening OPEC’s influence.

If OPEC cannot control production, that could mean trouble.

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Back in the Market?

If the United Nations lifts its 5-year-old ban on Iraqi oil exports, world oil prices could drop $2 to $4 a barrel. Iraq’s oil reserves are second only to those of Saudi Arabia.

OIL PRICES

Benchmark crude prices per barrel, quarterly closes and latest: (please see newspaper for full chart information)

1996: $17.78

RESERVES

Proven oil reserves in billions of barrels:

Saudi Arabia: 258.7

Iraq: 100.0

United Arab Emirates: 97.7

Kuwait: 94.0

Iran: 89.3

Venezuela: 64.5

C.I.S. (ex-Soviet republics): 57.0