- The Washington Times - Friday, October 27, 2000

A threat by Iraq to retaliate against U.N. sanctions by halting oil exports sent crude prices higher yesterday and raised fears that gasoline prices will soon reach record highs.

The regime of Saddam Hussein has been demanding that the United Nations hold payment for the 2 million barrels of oil Iraq ships each day in euros rather than dollars. Yesterday, the Middle East Economic Survey reported that Iraq might withhold further exports starting Nov. 1 under the U.N. food-for-oil program, unless that demand is met.

The threat sent crude prices, already elevated because of tensions in the Middle East, up 75 cents to $33.71 in New York trading. Analysts said both oil and gasoline prices probably will go much higher in the likely event that Saddam makes good on his threat.

Adam Sieminski, oil specialist with Deutsche Bank in Baltimore, said crude prices could hit records near $50 a barrel and gas prices could hit records near $1.75 a gallon if Iraq withholds its exports from an oil-thirsty world that already is short on stocks of nearly every petroleum product.

"This puts Saddam Hussein at center stage again. The next thing I expect is for him to say he's also holding oil off the market to support the Palestinians," said Mr. Sieminski. "He's got nothing to lose from this. And Iraq's been willing to do this before to get its way."

Twice in 1997 and once again a year ago, Saddam halted oil shipments to press his grievances with the United Nations, he said. This time, Saddam has a very good chance of getting what he wants since the move is likely to drive oil prices to pain thresholds never tested before in the West, the analyst said.

Iraq's move is aimed squarely at riling the United States by demanding that the oil funds be held in euros rather than dollars, Mr. Sieminski said. Oil producers traditionally have accepted payment for their oil in dollars.

Iraqi Central Bank Deputy Governor Abdel Ilah Boutros stressed that the move was a strike against the United States in an Agence France-Presse interview this month. "The dollar is the currency of an enemy state and must be abandoned for other currencies, including the euro," he said.

Mr. Hussein also appears to be trying to help his friends in Europe France and Russia, in particular, which have been pushing for an easing of the U.N. sanctions. Three European countries France, Russia and Britain sit on the U.N. Security Council, which is weighing the Iraqi demands. The United States has used its veto power to resist any easing of the sanctions in the past.

The United States has the best weapon to deal with the Iraqi threat, since it can tap once again into its 571-million-barrel Strategic Petroleum Reserve to counter any temporary suspension of Iraqi oil sales, said Mr. Sieminski.

President Clinton already has ordered the release of 30 million barrels of oil from the reserve this month in an effort to reduce elevated oil prices.

Mr. Clinton could release another 2 million barrels a day to offset the Iraqi embargo for three months without seriously draining the reserves, said Mr. Sieminski. The White House has said it would take such action if Iraq posed a threat.

Saudi Arabia has at times offered to make up any shortfall caused by Iraq by pumping more oil. But some analysts question whether it has enough spare capacity on hand to completely fill a 2-million-barrel-a-day gap. In any case, analysts say the Saudis could not cushion the immediate impact of an Iraqi embargo because it would take time for them to ramp up production.

"When I saw the story, I wanted to laugh," said Mordechai Abir, an energy researcher at Hoenig & Co. in New York. "The Iraqis are doing this just to show the good old U.S.A. what they think of it. They will get their payment in euros."

Iraq has been under U.N. sanctions since its August 1990 invasion of Kuwait. Since 1996, Iraq has been able to export oil under U.N. supervision in return for basic necessities. The money from its 14 million barrels of weekly oil sales is paid in dollars into an escrow account in New York, which currently holds between $10 billion and $11 billion.

The U.N. sanctions committee has yet to respond to the demand that the money be paid in euros. Some analysts say the demand is not unreasonable and the United States and United Nations are likely to agree to it rather than risk a major disruption of oil supplies.

"There is no good reason for the U.S. not to agree," said Nauman Barakat, vice president at ABN Amro Inc. in New York. "It both assures continued supplies and helps prop up the euro."

The euro has dropped to record lows in recent days in part because Europe's sharply higher oil bills this year have had to be paid in dollars. The United States earlier this month joined with Europe and Japan in an effort to prop up the falling euro, and might view complying with Iraq's demand as another way of aiding the sagging currency.

Not all analysts think an Iraqi embargo would send oil prices to record highs over $40 a barrel.

"The market reacted quite strongly given that it is not definite," said Tim Noest, an analyst at ADM Investor Services International. "But if it does happen, we'll see the market go higher, maybe by another 50 cents if Iraqi oil exports are cut off completely."

Some analysts also expect any export halt by Iraq to be offset at least in part by a production increase by OPEC. The oil cartel has said it may add another 500,000 barrels a day if oil prices top $28 a barrel for 20 consecutive days. Today would mark the 20th day that prices have well exceeded that level.

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