U.N. Will Let Iraq Sell Oil for Humanitarian Supplies

In a deal likely to lower oil prices, Iraq signed an oil-for-food agreement with the United Nations on Monday that will allow Baghdad to sell $1 billion worth of oil every 90 days to pay for humanitarian supplies badly needed by the Iraqi people.

The deal follows four years of on-again, off-again negotiations and marks the first time Iraq will sell oil on the open market since U.N. economic sanctions were imposed on it after its 1990 invasion of Kuwait.

Reviving even part of Iraq’s production will result in the biggest single change in the oil market in six years, oil industry analysts said, and will probably bring world prices down about $2 a barrel. Analysts said that decrease could mean more than 4 cents off the U.S. retail price of a gallon of gasoline.

Under terms of the agreement, U.N. monitors will ensure that oil profits are spent on food and medicine rather than on weaponry or government needs. And up to $150 million will go to Iraq’s northern Kurdish minority for each $1 billion in sales, a stipulation added by the United States.

The White House called the agreement “an important victory” and “long overdue.”

The regime of President Saddam Hussein has balked at selling oil since the U.N. embargo was imposed because doing so would mean yielding control of how the revenue was spent.

U.N. Ambassador Madeleine Albright, who has been a major behind-the-scenes force in the negotiations, called the deal “a great day for the United States. . . . We have made sure that the people of Iraq are assured of the proper provisions, but at the same time the very tight sanctions regime that has been imposed upon Iraq remains in place.”

Oil futures Monday closed $1.84 higher at $22.48 per barrel in trading on the New York Mercantile Exchange, for the strongest one-day surge in three months. Oil prices had fallen last week in anticipation of the agreement, and Monday’s trading was a correction, analysts said.

The Organization of Petroleum Exporting Countries, of which Iraq is a member, is scheduled to meet June 5 in Vienna to discuss how to accommodate Iraq’s reentry into the market.

The U.N. agreement has a downside for the United States, which has long sought to see Hussein toppled. The agreement, which must be renewed after six months, will probably be viewed at home as a victory for Hussein, and once the oil revenues begin flowing his political prospects are likely to improve.

News of the agreement was celebrated in Baghdad, wire agencies reported. Women and children danced in the street, drivers honked car horns and men fired guns into the air--a common expression of either delight or anger in the Middle East. National hymns lauding Hussein were broadcast on evening television and radio programs.

Prices of several important foods dropped, and the value of the Iraqi currency, the dinar, almost doubled, from 800 to the dollar to 450 to the dollar. Before the U.N. talks became serious, a dollar bought 3,000 dinars.

A statement by Iraqi Culture and Information Minister Abdul-Ghani Ghafur carried by the Iraqi News Agency described Monday’s deal as “a step to alleviate the suffering of the Iraqi people.” The statement described the White House as “frustrated” at having been unable to thwart an agreement.

The expected boost for Hussein prompted Republican presidential candidate Sen. Bob Dole of Kansas to condemn the agreement, saying that offering the Iraqi leader a “lifeline to prolong his dictatorship is bad policy and bad strategy.” He also said the accord raises fundamental questions on distribution and monitoring.

“President Clinton needs to learn when to say no to the United Nations,” Dole added. “That is not leadership; it is abdication.”

Iraqi opposition groups abroad welcomed the deal.

“For a long time, we have believed the United Nations should distinguish between the Iraqi regime and its people in these sanctions,” said Hamid Bayati, London-based representative of the Supreme Council for Islamic Resistance in Iraq.

About 4,500 Iraqi children die monthly because of illness, up from 600 a month before the 1991 Persian Gulf War, and there are 20,000 new cases of malnutrition monthly, up from virtually none before the war, according to UNICEF.

Annual personal incomes have declined from a prewar average of $3,000 to a few hundred dollars, Iraq specialists said.

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Oil will begin flowing in about a month, Iraq’s chief negotiator at the United Nations, Abdul-Amir Anbari, said Monday. Industry experts predicted that the process will take longer, because repairs are needed on the pipeline through Turkey that will be the major conduit for most of these sales.

Special accounts also must be set up and U.N. monitors put in place to supervise aid distribution.

Baghdad is expected to sell up to 700,000 barrels of oil per day, far below its prewar daily production of 3.4 million barrels. It currently produces about 550,000 barrels daily, most of it for domestic consumption, although Iraq is known to have smuggled some oil through neighboring Turkey and Iran.

Iraq has the second-highest reserves in the world, after Saudi Arabia. Proven reserves total 112 billion barrels, or 11% of the world’s total known oil resources, with estimates of total reserves reaching more than 200 billion barrels.

Although Hussein could have acquiesced to U.N. requirements long ago, he and the state-controlled media have always blamed the United States for the country’s hardships. Expectations are now high in Iraq that the oil-for-food agreement is the first step toward a lifting of sanctions.

In fact, the United States and Britain insisted throughout the talks that Iraq’s compliance would not be considered a first step toward ending the overall embargo on oil sales or any of the other economic sanctions.

“In reality and legally, [Iraqis] are still where they were in August 1990, when sanctions were imposed,” said Toby Ash, an Iraq specialist at the Middle East Economic Digest in London.

In the short term, Baghdad’s oil sales will make only a slight dent in the plight of Iraq’s people, analysts said.

“It is not going to make a huge amount of difference to most Iraqis,” Ash said. “They won’t starve, but life won’t be particularly good.”

Contributing to this report were Times staff writers John Daniszewski in Cairo, Edwin Chen in Bal Harbour, Fla., and Patrick Lee in Los Angeles.

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Iraq’s Oil Riches

Iraq owns the second largest oil reserves in the world after those of Saudi Arabia. Some facts on Iraq production:

Share of world oil reserves: 11% (112 billion barrels)

BARRELS PER DAY (in millions)

Before sanctions: 3.4

Estimated under U.N. plan: 0.7 million

MAIN OIL FIELDS:

Smuggling through Turkey and Iran is reported to be widespread.

IMPACT AT THE PUMP

The sale of Iraqui crude could lead to a slight reduction in prices at the pump. But the additional oil amounts to only about a 1% increase in world production

The value of Iraq’s petroleum exports

Sources: U.S. Energy Information Administration, OPEC, Times wire reports