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 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 likely will bring world prices down about $2 a barrel. Analysts said that decrease could mean more than 4 cents off the 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 and 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 embargo was imposed because doing so would mean yielding control of how the revenue was spent.
Oil futures Monday closed up $1.84 per barrel at $22.48 per barrel in trading on the New York Mercantile Exchange, 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 size of the decline will depend in part on whether the Organization of Petroleum Exporting Countries, of which Iraq is a member, can agree to lower export quotas for other members to accommodate Iraq’s re-entry into the market when OPEC meets in Vienna, Austria, on June 5. Analysts doubt that will happen.
The U.N. agreement has a downside for the United States, which has long sought to see Saddam toppled. The agreement, which must be renewed after six months, will likely be viewed at home as a victory for Saddam, and once the oil revenues begin flowing his political prospects are likely to improve.
A statement by Iraqi Culture and Information Minister Abd-al-Ghani Abd-al-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.
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.
An average of 4,500 Iraqi children are dying monthly because of illness, up from 600 a month before the war, and there are 20,000 new cases of malnutrition monthly, up from virtually none, according to UNICEF.
Annual personal incomes have declined from a prewar average of $3,000 to a few hundred dollars, Iraq specialists said.
Oil will begin flowing in about a month, Iraq’s chief negotiator at the United Nations, Abdul Amir al-Anbari, said Monday. Industry experts predicted that the process will take longer, because repairs are needed on the Kirkuk-Yurmurtalik pipeline through Turkey, which will be the major outlet 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 level of 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 percent of the world’s total known oil resources, with estimates of total reserves reaching more than 200 billion barrels, largely in the Kurdish north and in the south, which is populated mostly by Shiite Muslims whose sect of Islam differs from that of the Saddam regime.
Although Saddam 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, a claim made openly by Iraq’s U.N. Ambassador Nizar Hamdoon on Monday.
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 other of the economic sanctions.