Our Man in Baghdad
Saddam's demise could actually hurt his oil-producing neighbors
By ADAM ZAGORIN

Keep Saddam bottled up in Iraq like an evil genie? Sure. Maintain the United Nations embargo and limit his oil sales? Absolutely. But actually get rid of him? Not on your life.

At least not if you're one of the world's major non-Western oil producers, particularly Iraq's hard-pressed neighbors in the Gulf, long caught between their fear of Iraq's military power and the chaos that could follow Saddam's demise. All are keenly aware that if he left the scene, Iraq's isolation would likely end and what was once the world's second biggest producer could start pumping again in earnest. That, in turn, would quickly drive prices down, even below currently depressed levels. "It is in the financial interest of many oil producers that Saddam remain weak, but not so weak that he does not survive," says Raad Alkadiri, an analyst with the Petroleum Finance Co., a Washington-based consultancy.

Last week, after a brief spike occasioned by the threat of U.S. military action in the Gulf, oil prices were again falling sharply, down to about $12 per bbl.--close to a 12-year low and, in real terms, barely above the price that prevailed before the 1973 Arab embargo. Leading producers had already cut their output by 2.6 million bbl. a day last spring in a vain attempt to reduce oversupply, but as OPEC meets this week in Vienna, no one can be sure the market has bottomed out. Worse, there appears no end in sight to the oil blues, brought on by the Asian crisis and slack demand elsewhere in the world. According to the U.S. Department of Energy, prices are not expected to fully recover until 2007.

Cheap crude has, of course, been key to tamping down inflation in both the E.U. and the U.S. But it has made life much more difficult for the already deflated economies of Iraq's Gulf neighbors. These countries, which control roughly 45% of global petroleum reserves and together form the largest supplier of crude to the E.U., are major purchasers of arms and capital goods from the West.

Imagine, then, what would happen if millions of barrels of Iraqi crude suddenly came gushing onto the market. Even with profit-hungry French, Russian and other big oil companies offering to help, Iraq's poorly maintained wells would take at least a year, and probably longer, to pump oil in quantities to significantly increase world output. But most experts believe that prices would start falling immediately in anticipation of accelerating market overhang. And that could spell trouble not only in the Gulf, but make costly investments in oil exploration from the Caspian to China unprofitable.

For Saudi Arabia, which is facing a politically delicate transfer of power from ailing King Fahd to his designated successor, Crown Prince Abdullah, the prospect of unfettered Iraqi production would be more than just unwelcome. For each dollar the price of oil drops, Riyadh loses some $2.6 billion in revenues. The kingdom took in about $45 billion from oil exports in 1997; revenues this year may not even reach $30 billion. As a result, the Saudi budget has moved $13 billion into the red; government spending is being cut by 10% and debts for arms purchases rescheduled.

As for Iraq, the regime is currently pumping about 2.5 million bbl. a day, about 1 million bbl. a day more than last year, according to James Placke, an expert with Cambridge Energy Research Associates. The U.N. has raised Baghdad's 180-day export ceiling to $5.25 billion, up from the previous limit of $2 billion. But Iraq's oil fields can't pump nearly that much, so the U.N. is allowing Saddam to spend $300 million to upgrade capacity, a process that is behind schedule and could take years to complete. In the meantime, Iraq's dictator is trying to make the best of things.