Mideast Economic Notes

By John Haldane

Iraqi Pipeline into Saudi Arabia Close to Completion

Iraq's new pipeline from Zubair in southern Iraq to Saudi Arabia is scheduled for completion this September. It will connect with the existing East-West Pipeline (formerly called the Petroline) which links the oil producing areas of Saudi Arabia's Eastern Province with the Red Sea port of Yanbu. The Iraqi segment will have an initial capacity of 500,000 barrels per day (bpd).

This new Iraqi export capability will help replace its damaged offshore Gulf terminals and will supplement the existing Iraqi pipeline to the Mediterranean through Turkey.

Farther in the future, Iraq will profit from a planned second Saudi pipeline which is to run parallel to the existing East-West Pipeline and have its own Red Sea loading terminal. When this Phase II Saudi project is completed, Iraq's tie-in export capacity through Saudi Arabia will be raised to approximately 1.5 million bpd. While no construction schedule has been announced, Phase II could be completed in about two years. At that point, Iraq will have brought its oil export potential close to pre-Gulf War levels.

Iraqi officials say these pipelines will be used to full capacity, raising a potentially serious confrontation with other OPEC members. Iraq's current quota is 1.2 million bpd, whereas the two pipeline hookups with Saudi Arabia would eventually enable Iraq to export up to 3 million bpd. Iraq's determination in this matter was signaled by Deputy Oil Minister Chalabi's statement that "I personally believe that my country's share of the market should be 3 million bpd. We will insist on our fair share of the market."

Iran Increases Barter Efforts

As the Gulf War grinds on with no end in sight, Iran has been forced by a lack of foreign currency to turn increasingly to barter trade deals to secure the industrial goods and agricultural products it vitally needs for its faltering economy. An estimated $5 billion worth of such deals have been signed or are in late planning stages. Thus, Iran is becoming more involved with those trading partners willing to sign bilateral, government-to-government, trade pacts exchanging Iranian crude oil for industrial and agricultural goods and services.

By far the largest barter agreement made to date has been with Turkey, for approximately $3 billion. Turkey will pay for about six million tons of crude oil, two million tons of refined products, and a variety of Iranian non-oil goods with Turkish metals, chemicals, agricultural produce, electrical goods and industrial machinery. In addition, Volvo of Sweden has signed a $250 million barter deal, Voest Interhandel of Austria is negotiating a $600 million arrangement, Impianti of Italy is working on a $1 billion agreement, and New Zealand has agreed to take 6 million barrels of oil in exchange for the sale of 132,000 tons of lamb and mutton. Other countries paying for substantial amounts of Iran crude with sales in the Iranian market are Brazil, India, South Korea, Thailand, Uruguay, the Soviet Union, and most of the Eastern European nations.

The Eastern European countries each do an estimated $400 million worth of business with Iran annually, compared to less than 30 percent of that amount before Iran's revolution.

At the end of 1984, Iran was shipping between 300,000 and 350,000 bpd under such barter deals. By early this year, 450,000 bpd were involved, and experts predict a rise to over 500,000 bpd by the end of 1985. Oil is sold under these barter deals at price levels reflecting both official and spot market prices. In the past, this has meant that about 70 percent was at the official price and 30 percent at the spot price. There have been instances, however, where the foreign exporter, in order to gain entry into the Iranian market, has agreed to cover the gap between the two oil prices.

About half of Iran's current oil exports of 1 million bpd now are committed under such bilateral trade agreements. This means, of course, that nonparticipating world traders are losing their share of an $18 billion market.

The success of Iran's barter efforts, however, has begun to concern officials of the state-operated National Iranian Oil Company (NIOC). They note that some barter oil is resold by foreign buyers at low spot prices, thus undermining NIOC's official price sales to clients.

EEC Holds Fast on Petrochemical Tariffs

Despite strong Gulf Cooperation Council (GCC) protests over several months, the European Economic Council (EEC) is standing fast in its determination not to remove its tariff on methanol and other petrochemical products. The EEC maintains that trade between Europe and Saudi Arabia and other nations is governed by the GATT generalized system of preferences (GSP), a scheme to give developing countries easier access to the developed world's markets. Under this system, a fixed quantity of exports is duty-free; the rest is liable to tariffs up to 20 percent.

The problem that Saudi Arabia now faces, and one that Kuwait and other Arab petrochemical producers will come to face, is that their new, technologically-advanced plants are designed to produce huge quantities of various petrochemical products for export, not for the small local markets. Therefore, the GCC countries want easier access to EEC markets. The GCC producers first became concerned in June 1984, when the EEC imposed a 13.5 percent duty on methanol imports from Saudi Arabia after the Kingdom had exceeded its duty-free quota of about $200,000 for the year. Again in January 1985, a similar duty was imposed when Saudi Arabia exceeded its increased annual quota of $224,000 in the first three weeks of the year. Now it appears that Saudi Arabia is nearing the limit for EEC duty-free quotas of ethylene glycol, styrene and polyethylene.

Saudi Arabia enjoys the strong backing of the other GCC member states, which are threatening to retaliate against EEC exports if the Community does not lower its tariffs. For example, the Federation of Arab Gulf Chambers of Commerce recommended in July that Arab states impose custom duties on imports from EEC members to match those imposed by the EEC on Arab goods. EEC exports of goods and services to Saudi Arabia presently run at about $20 billion per year, compared to imports from Saudi Arabia of only $8 billion. EEC exports to the entire Gulf area could be jeopardized if the dispute is not resolved.

Earlier this year, the EEC offered the GCC a non-preferential, region-to-region trade agreement which would have covered petrochemicals. The arrangement would have provided most-favored nation treatment of Gulf exports, but would have meant no immediate reduction in tariffs on petrochemicals, which presently range from 13 to 14 percent for key products. The GCC rejected the proposal. At the same time, the EEC refused to consider a GCC request that its duty on petrochemicals be reduced to the 4 to 7 percent range that applies to most dutiable imports into the Gulf.

Since recent talks ended with no resolution, and both sides have much to lose in the absence of a petrochemical agreement, the discussions will probably resume in the near future.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.