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Rising Demand for Oil May Spell End of Iraq Embargo

THE United States faces a Catch-22 dilemma: Iraqi oil may be needed by the end of the year to dampen price increases. Ironically, the healthier the world economy, the more quickly Iraqi exports will be seen as indispensable, and the US position will have gone full circle: having boycotted Iraqi oil ostensibly to protect oil consumers, the US may have to allow Iraqi exports in order to protect those same oil consumers.

If the Organization of Petroleum Exporting Countries is correct in its newest calculations, consumers should expect higher oil prices again this year - despite the fact that last week's one-day ministerial meeting in Vienna revealed only deepened divisions and failed to address either pricing or production policy.

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``We are trusting to the `invisible hand' this time,'' explained Gonzalo Plaza, chairman of OPEC's board of governors. ``Thanks to the war, the market is very tight, so we don't need to intervene.''

Oil prices have sunk back to prewar lows. Nonetheless, consumers must be wary because the oil industry expects prices to bounce back. There is near consensus that a 20 to 25 percent increase is possible - adding $250 million a day to the world's oil bill.

But OPEC's new optimism is born of weakness, not strength. A ``hands-on policy'' to control production was not even attempted, because efforts to cut back output by lowering quotas founders on irreconcilable political differences, painfully aggravated by the Gulf war.

Saudi Arabia refuses to intervene. The minister of petroleum, Hisham Muhyi al-Din Nazir, stated categorically, albeit disingenuously, that the kingdom believes in market forces and will not ``manipulate'' supply. Algeria, reflecting broad concerns, protested that it was almost criminal to sell oil at such distress prices, but was ignored.

Ironically, it is the Gulf war that dealt OPEC its trump cards. The war weakened OPEC politically, rendering any effort to cut production to bolster prices very difficult. It also worsened the recessionary trend that trimmed oil demand.

But the war actually bolstered OPEC's bargaining position. World oil supply is now precariously balanced: without Kuwaiti and Iraqi production, there is no spare capacity.

OPEC reckons that a modest economic recovery will add 1 million to 1.5 million barrels per day (b.p.d.) to world demand, sopping up the small surplus and absorbing the modest extra inventories. OPEC's calculations are supported by the latest market assessment from the International Energy Agency in Paris, a fact that is significant because the IEA has long been suspected of forecasts designed to soften prices and weaken OPEC.

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Other signs corroborate OPEC's new confidence in the ``invisible hand.'' Consumers are holding excess inventories, indicating that they, too, expect prices to firm. Indeed, the real fear is that prices will rise too far. Saudi Arabia has increased output again to rebuild stocks overseas - precisely to ensure against a possible shortage and price speculation.

The wild card is production from Iraq and Kuwait. At best, Kuwait will produce 200,000 b.p.d. by the end of the year, largely from the Japanese-controlled offshore concession; its brethren in the Gulf Cooperation Council last week categorically refused to advance or ``loan'' crude oil to Kuwait from their own production, citing the possible shortfall.

While Kuwait's production is limited by war damage, Iraq is politically constrained. It could quickly export up to 1 million b.p.d., in spite of massive damage, but is totally dependent on US whim to lift the boycott, and then on Saudi Arabia to open the southern pipelines.

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