Saddam May Soon Unleash His Best Weapon: Oil Blackmail

Gas-guzzling Americans have done their bit. So has oil demand in Asia, swiftly rising on the back of a stronger-than-expected economic rebound. But a hidden culprit behind the highest oil prices in over a decade is Iraqi dictator Saddam Hussein.

Since early August, Saddam has been ratcheting up the tension in the Persian Gulf. In the same period, oil prices have shot up, hitting post-gulf war highs on Sept. 20 of $37.50 a barrel. First he made a saber-rattling speech on Aug. 2 to mark the 10th anniversary of Iraq's invasion of Kuwait. Then, on Sept. 4, an Iraqi aircraft strayed over Saudi airspace for the first time since the war. Most ominously, Iraq accused Kuwait on Sept. 16 of illegally tapping into Iraqi oil fields through the use of "directional" drilling, which can burrow across borders. Similar accusations served as a pretext for the invasion of Kuwait. "We're taking this stuff very seriously," says a senior U.S. Administration official in Washington.

Though military action can't be ruled out, the big worry now is that Saddam might unleash potentially the scariest weapon in his depleted arsenal: oil blackmail. He wants to erode the sanctions that have weighed so heavily on Iraq. He may threaten to pull Iraqi oil from the markets to try to break the U.N.'s resolve. Already, the Russians are calling for an end to sanctions and are planning commercial flights to Baghdad.

"CENTER STAGE." The Iraqi ruler will have ample opportunity to publicize his threats further at OPEC's 40th anniversary summit, beginning in Caracas on Sept. 27. Almost every oil producer on earth is pumping flat out. Even oil giant Saudi Arabia will need time to reach levels much above the 9.3 million barrels a day it's targeting for next month. If Iraq were to slow down or shut off the 2.4 million to 3 million barrels it's producing, prices could go as high as $50 a barrel. Says Patrick L. Clawson, research director at the Washington Institute for Near East Policy: "It's a way for Saddam to try to grab center stage."

Saddam just might be provoked enough to announce production cutbacks. Baghdad, after all, is expecting bad news to come out of a crucial Sept. 26 meeting in Geneva of the U.N. Compensation Commission, which is weighing claims of $16 billion lodged against Iraq by Kuwait Petroleum Corp. for damages sustained during the gulf war.

Of course, slashing oil production could prove devastating for Iraq's already-ruined economy. And a sustained global energy crisis would not help relations with Iraq's Western friends such as France, which was gripped by protests recently against high energy prices. That's why some Administration officials believe Saddam will avoid production cutbacks.

Still, Saddam is a master manipulator of oil markets: threats to cut off supplies during talks on the oil-for-food plan with the U.N. have repeatedly sent oil prices higher. A similar bounce occurred in January, when Baghdad claimed the Y2K bug was affecting output. And Iraq has made tankers wait to load oil, causing supply hiccups. There are signs Baghdad is playing such market swings through offshore trading operations it controls.

Saddam's threats are a reminder that the world badly needs Iraqi oil. That was not the case when Iraq was absent from the market--from the gulf war in 1991 to the partial resumption of oil-for-food sales in 1996. But world consumption has increased 4.5 million barrels per day since then, and Iraq has again become a key exporter. Saddam may yet overplay his hand. His strategic moves--from invading Iran in 1980 to occupying Kuwait in 1990--have been disastrous. But when it comes to playing world energy markets, the Iraqi dictator has few equals.