Term Paper on "Oil for What? Illicit Iraqi Oil Contracts"

Term Paper 5 pages (1578 words) Sources: 1

[EXCERPT] . . . .

Oil for What? Illicit Iraqi Oil Contracts and the UN Security Council

In Heaton's (n.d.) work, the United Nation's Iraqi Oil-For-Food program, and its suspected illicit dealings, are investigated.

Over a 6 1/2-year period, beginning in 1996, more than 1,300 oil contracts were issued, with the intended purpose of humanitarian relief for the Iraqi people. However, many have questioned whether all of the money transferred during contract issuance through oil extraction went to the humanitarian aid it was originally intended for. Heaton looks to answer the economic question of whether or not Saddam Hussein utilized these contracts to line his personal coffers, as well for the purchase of weapons.

This is an important question that needs to be answered for two reasons. First, the United Nations needs to understand not only where their Oil-For-Food program went right, but also where it went wrong. The idea behind the program is a sound one. It allows the U.N. To economically sanction a country, punishing its leaders, but still be compassionate to the general populace that have little to no choice in their country's matters. However, as this work demonstrates, if there are loopholes in the program, and the details are not sufficiently considered, the punishments, meant by the economic sanctions, will barely be felt by those in power. And, in fact, despite rules to the contrary, sanctioned countries cannot only acquire the hard currency they desire, but also weapons as well, circumventing restrictions.

The article implies that Hussein was able to offer oil contracts significantly below market value, in exchange for kickbacks, which were given when the contracts were resold to other individuals or organizations, to actually extract the oil, closer to market price.

Second, a lesson regarding the vulnerability of the U.N. Security Council, and its votes, can be had, should these allegations of illicit contracts prove true. Although the Security Council is intended to be a globalized judicial force, above reproach, Heaton appears to indicate that bribery and manipulation were utilized over the course of the program, to sway votes of Security Council members towards Iraqi-friendly policies. This is a weakness, if true, that certainly needs to be addressed.

To come to these conclusions, the author uses several data sets to determine whether or not the Iraqi government used illicit contracts for under-priced oil, to reward those who voted pro-Iraqi, and entice other countries to follow suit. Data was garnered from the Iraq Survey Group, including the list of 1374 oil contracts, which were published in Annex B. Of its Comprehensive Report, which includes the individual or company who received the oil allocation, the amount of the allocation, the name of the company that eventually extracted the oil, and the amount that was eventually extracted, along with the extent of Iraq's illicit weapons program.

In addition, the estimated profit per contracted barrel was used, although these profits were based on SOMO estimations of value for payments and may be biased.

The make up the Security Council, including the rotating 10 member nations, over the course of the Oil-For-Food program, is another data set included in the calculations. Country data for contract recipients was also utilized, including: the size of the recipient country's oil industry, whether or not the government is democratically elected, and whether or not the country supported the anti-Iraq coalition during the Persian Gulf War of 1991. Lastly, data including how Security Council member countries voted on three substantive resolutions relating to Iraq during the Oil-For-Food program was utilized to determine if the country could be deemed pro-Iraq, moderate, or anti-Iraq.

Econometric methods are a quantitative approach at determining causal relationships, in a data set, and then forecasting what is occurring, or what will occur. The author uses simple linear probability models, using weighted least-squares, probit, and logit to provide comparable estimates, to come to his conclusion that indeed the Oil-For-Food program not only allowed Hussein to purchase illicit weapons and obtain hard currency for other items, but also was utilized to influence the votes of the U.N. Security Council. The least-square method allows for the efficient combining of information from multiple instruments, for regressions, where there are fewer co-variates than instruments.

This method overcomes the tendency that when there are endogenous variable present, the estimator of the parameter of interest is typically inconsistent. As an example, in determining the relationship between prior support for Iraq and the amount of contracts received, the unit of observation is all the countries, which served on the Security Council, during the program. Those who voted against the five identified anti-Iraq resolutions are deemed to be Pro-Iraq. Those who voted against some of the resolutions are deemed marginal. And, those countries that voted for all of the resolutions were deemed to be anti-Iraq.

The equations used in the two-stage least-square regression are as follows

Stage 1:

Stage http://upload.wikimedia.org/math/2/2/a/22ac16c64b7aa629fb8dfddfe9c95de5.png

In the first stage, each endogenous predictor variable is regressed on all valid instruments, inlcuding the exogenous covariates in the main regression. The approximations of the endogenous covariates are not correlated with the error term, because the instruments are exogenous. In this way, they provide the method for analysis of the relationship between the outcome variable and endogenous predictor variables. The regression of interest, during the second stage, is as usual, with an exception being the endogenous covaraite being replaced with the approximation that was estimated during the first stage. This results in a consistent slope estimator.

To ensure the associated standard errors are computed correctly, a slight adjustment is made to the sum-of-squared residuals, during the second stage fitted model.

There are no assumptions stated in the article.

The conclusions the author draws in this article are numerous. First, the author surmises that Iraq was able to find a loophole in the United Nation's Food-For-Oil program. That this loophole allowed the country to sell oil contracts at below market prices to sympathetic entities. These entitites would then resell the contracts, nearer to market value, and give a kickback to Hussein, earning 'rent' on the contract. In this way, Hussein was able to obtain hard currency and other items meant to be restricted by the U.N. sanctions, for the crimes against humanity the country had committed. In addition, this method of sale meant that the funds that should have gone to humanitarian efforts instead went into Hussein's personal coffers.

The author also found that the evidence gathered links the receipt of illicit oil contracts to the voting behavior of the Security Council. A significant percentage of oil contract receipts were found to have a positive relationship to a country's involvement on the Security Council. Furthermore, it was clearly demonstrated that those countries who had demonstrated pro-Iraq behavior in the past were far more likely to receive oil contracts than those who were either marginal or anti-Iraq. The quantity of oil contracts were often largely disproportional to the country's oil industry, further demonstrating a bias.

The author further surmises that the increases in the flow of contracts to Jordan and Syria, during the 5th and 9th phases of the Food-For-Oil program demonstrated a positive relationship to the escalations in the air strikes against Iraq, as a means of obtaining military supplies from these two Iraqi allies.

Lastly, Heaton concludes that although Hussein used the program for his own personal and political advantage, the program was beneficial to humanitarian efforts. A large portion of the money acquired through the sale of the oil contracts did go towards food, medical supplies, and other humanitarian supplies desperately needed in Iraq. However, the primary lesson learned in the program was that all details need to be thoroughly covered, otherwise loopholes, such as the ones in the Iraqi program, can reduce the effectiveness of said program. Less autonomy to the sanctioned country needs to be given, and more control needs… READ MORE

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