Global Policy Forum

By Global Policy Forum and eleven NGO partners

A new crisis quickly overshadowed Resolution 1409. A clash over oil pricing methods resulted in rapidly falling Iraq oil sales and a severe shortfall of funds for the humanitarian program.

The crisis had its origins in late 2000 when oil traders buying Iraqi oil started to sell the oil at marked-up prices and kicked-back to Baghdad a portion of the premium they received. This scheme gave the Government of Iraq the cash it eagerly sought. Russian traders acted as the major intermediaries and profited handsomely. The kickback varied, but in early 2002 stood at 25-30 cents per barrel, or over 1% of the oil price, with price premiums running at 30-45 cents. (133) Had it continued, this scheme might theoretically have provided the government of Iraq with about $100 million in cash revenue annually, based on recent prices and export levels. Such a sum is relatively small in comparison to Iraq's estimated smuggling revenues of at least $1.5 billion.

The US and UK demanded that the Security Council take steps to prevent these kickbacks. Some delegations objected, but ultimately the US-UK prevailed. In October 2001, the Iraq Sanctions Committee introduced a new system known as "retroactive pricing," which reduced premiums to 10-15 cents per barrel by July 2002 and nearly eliminated all kick-backs. But the Council's new pricing system left oil buyers uncertain of final prices at the time of purchase. Increased uncertainty for buyers and reduced profit margins for oil traders reduced demand for Iraqi oil by a third or more. (134)

The shrinking market took a heavy toll on the humanitarian program. In mid-February OIP Executive Director Benon Sevan spoke to the Council of the program's "financial crisis." (135) Iraq's refusal to sell oil for a month (April 8-May 8, 2002), announced as a show of support for Palestinians, further worsened the situation, as did weakening oil prices. As the demand crisis wore on, the pricing method had an increasingly negative effect on the humanitarian program. By July 26, a funds shortfall left the UN unable to act on 1,001 approved contracts worth $2.1 billion. (136)

Many in the Council came to believe that the US-UK pricing system was punitive and unacceptable. (137) The French circulated proposals in June to escape the impasse and restore acceptable prices, an initiative that attracted broad support. But the US-UK refused, insisting that the Council must dutifully block cash to the Iraqi government and blaming Iraq entirely for negative humanitarian consequences. Though many in the Council pressed for a speedy resolution, negotiations dragged on, while revenue shortfalls grew. Once again, the people of Iraq were forced to pay a heavy price.

Footnotes

(133) UN Oil Overseers Report, March 14, 2002 notes the premium level. Estimates of the kickback have appeared in the Financial Times (June 7), Middle East Economic Survey (July 1 and 8), and Reuters (July 16).

(134) UN Oil Overseers Report, March 14, 2002. For some comment on the pricing issue see David Cortright, Alistair Millar and George A. Lopez, Sanctions, Inspections and Containment (Goshen, Indiana, 2002).

(135) Statement by Benon V. Sevan, Executive Director of the Iraq Programme at the Informal Consultations of the Security Council, February 26, 2002 (as posted on the OIP web site).

(136) "Weekly Update," 20-26 July, 2002, Office of the Iraq Programme web site.

(137) Not surprisingly, the Russians took the most vocal position. See, for instance, "In Connection with problems in implementing UN humanitarian program for Iraq," Press release of the Government of the Russian Federation, June 17, 2002. Many other, more disinterested delegations, opposed firmly but quietly the US-UK stance.

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