[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                THE UNITED NATIONS OIL FOR FOOD PROGRAM

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 14, 2003

                               __________

                           Serial No. 108-18

                               __________

       Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________

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                            WASHINGTON : 2003
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
  Vice Chairman                      PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho

                  David V. Marventano, Staff Director

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                 Subcommittee on Energy and Air Quality

                      JOE BARTON, Texas, Chairman

CHRISTOPHER COX, California          RICK BOUCHER, Virginia
RICHARD BURR, North Carolina           (Ranking Member)
ED WHITFIELD, Kentucky               ALBERT R. WYNN, Maryland
CHARLIE NORWOOD, Georgia             THOMAS H. ALLEN, Maine
JOHN SHIMKUS, Illinois               HENRY A. WAXMAN, California
  Vice Chairman                      EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico           RALPH M. HALL, Texas
JOHN SHADEGG, Arizona                FRANK PALLONE, Jr., New Jersey
CHARLES W. ``CHIP'' PICKERING,       SHERROD BROWN, Ohio
Mississippi                          BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              KAREN McCARTHY, Missouri
STEVE BUYER, Indiana                 TED STRICKLAND, Ohio
GEORGE RADANOVICH, California        LOIS CAPPS, California
MARY BONO, California                MIKE DOYLE, Pennsylvania
GREG WALDEN, Oregon                  CHRIS JOHN, Louisiana
MIKE ROGERS, Michigan                JOHN D. DINGELL, Michigan
DARRELL ISSA, California               (Ex Officio)
C.L. ``BUTCH'' OTTER, Idaho
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Barnes, James J., Research Fellow, James A. Baker III 
      Institute for Public Policy, Rice University...............    25
    Caruso, Guy F., Administrator, Energy Information 
      Administration, U.S. Department of Energy..................    12
    Ebel, Robert E., Director, Energy Program, Center for 
      Strategic and International Studies........................    18

                                 (iii)

  

 
                THE UNITED NATIONS OIL FOR FOOD PROGRAM

                              ----------                              


                        WEDNESDAY, MAY 14, 2003

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Burr, Whitfield, 
Shimkus, Walden, Rogers, Issa, Otter, Tauzin (ex officio), 
Boucher, Wynn, Hall, and Brown.
    Staff present: William Cooper, majority counsel; Andrew 
Black, majority counsel; Peter Kielty, legislative clerk; Sue 
Sheridan, minority counsel; and Bruce Harris, minority counsel.
    Mr. Barton. The subcommittee will come to order.
    Before we start our hearing, we are going to show a video 
that appeared yesterday on Fox News about the subject of this 
hearing. It's about 2 to 3 minutes in length. Let's move the 
screen so the audience can see it as well as the members. 
Unfortunately, our friends at the press table can't see it, but 
if you want to get up and go out in the audience, you're not 
going to be penalized for that.
    [Video Presentation.]
    Mr. Barton. We have to say on the record that the editorial 
opinions are the opinions of that particular reporter and not 
necessarily the opinions of the U.S. Government, or the U.S. 
Congress, for that matter.
    The subcommittee is now going to come to order. We are 
going to proceed pursuant to Committee Rule 4(e) which governs 
opening statements by members and the opportunity to defer them 
for extra questioning. Is there any objection to continuing 
under that particular rule? Hearing none, so ordered.
    The Chair is going to recognize himself now for an opening 
statement.
    Four years ago, this subcommittee held a hearing on the 
Iraqi Oil for Food Program, operated by the United Nations. On 
March 26, 1999, we learned that the Government of Iraq was 
smuggling oil outside of the program, with significant impacts 
on the energy markets. Mr. Hall of Texas, who was then the 
ranking member of this subcommittee, said that he was 
suspicious of the program and that ``it could spawn a lot of 
abuse''. That's a direct quote from Mr. Hall's written 
statement.
    Mr. Shimkus, who was a member of the subcommittee but at 
that time not its vice chairman, said that legal and illegal 
Iraqi oil exports were leading to the closure of domestic 
marginal wells in his congressional district in Illinois and 
elsewhere, and that this was decreasing our dependence upon 
imported oil.
    Mr. Largent, a recently retired Member of Congress, who was 
then a member of the subcommittee, raised concerns that money 
intended for humanitarian assistance was not being spent in a 
proper manner. We've just seen an indication of that in the 
video.
    The concerns of those members at that time have been 
consistently confirmed. The U.N. Oil for Food Program has been 
shown to be a bad plan that has been implemented badly. The 
various food and medicine accounts have often been under-
funded. Inspectors in many cases could not stem the flow of 
illegal oil around the program. Saddam Hussein's regime has put 
illegal surcharges on oil sales and required kickbacks, giving 
funds to the regime and not to the Iraqi people, as was 
intended by the program.
    The General Accounting Offices estimates that, between 1997 
and 2001, Saddam Hussein accumulated some $6.6 billion from 
illegal oil smuggling and from illicit deals connected to the 
Oil for Food Program. Shortly after touring a freed Baghdad, 
General Tommie Franks said that it should have been called the 
``Oil for Palace Program''. He appears to have been right.
    We have since learned that the United Nations, or some of 
it's members, anyway, have been gaming the system alongside 
Saddam Hussein. In addition to underfunding humanitarian 
assistance programs, a surprising number of questionable 
contracts have gone to countries that were later conspicuous in 
their opposition to our forcing a regime change.
    Four years later, the government of Saddam Hussein has been 
removed. Thank the Lord for that. The people of Iraq are free, 
but they are not yet free from the U.N. sanctions imposed upon 
Saddam Hussein. Because there is no need for sanctions, there 
should be no need for that great exemption to sanctions that 
was mistakenly named Oil for Food Program.
    On June 3 of this year, the U.N. Oil for Food Program will 
cease to be authorized. It deserves to die a natural death, in 
my opinion.
    The Oil for Food Program is riddled with problems. First, 
oil sales in the program are not transparent. Buyers do not 
know the price they are paying until after they receive the 
oil. The money goes to the U.N. escrow account to be carved up 
by bureaucrats before it comes back, therefore slowing the 
process of reinvesting in the Iraqi oil sector. The necessary 
upgrading of old and damaged energy infrastructure in Iraq has 
been delayed and is continuing to be delayed, causing 
environmental decay, reduced access to their oil, and 
additional cost in recovery. I am told there are some $12 
billion in the escrow accounts at this point in time.
    The market price of oil is affected by developments all 
over the world because is easily transported. It's called 
``fungible''. A small amount of production at the margins has a 
great impact on global prices. That is why production quotas in 
the OPEC cartel, the frequent surpassing of them by member 
countries, is of interest to market participants. Consumers, 
producers and market participants in the U.S. and elsewhere 
deserve an oil sales program to be transparent, and made 
transparently so in international markets, where the full 
effects can be measured.
    Three percent of the Oil for Food Program proceeds are 
taken off the top for the United Nations itself. Talk about a 
sweet deal. Next, 25 percent goes to a U.N. Compensation 
Commission for war reparations, which surely need to be 
renegotiated now. Then there is a rigid set of supposed 
humanitarian assistance requirements for different sections of 
the country. Some of those have never been implemented. U.S. 
officials, including the Clinton administration, were concerned 
that Iraq was using revenues to buy prohibited military 
equipment and often other item of largess for high-ranking 
Iraqis. Again, our video has shown some of that.
    I will be sending a letter to the United Nations at the end 
of this hearing, asking that this Committee and the Congress 
receive a full accounting, and a transparent accounting, of the 
Oil for Food Program. Congress has no power to subpoena records 
of the United Nations, but I am going to encourage the U.N. to 
fully explain this program, not just to this Committee and this 
Congress, but to the world, because it has never been 
externally audited. Those who wish to continue the program 
should come clean about who has benefited and where the moneys 
have gone.
    I am also going to suggest that the U.N. transfer the 
uncommitted balance--and it's in the billions of dollars--to a 
humanitarian assistance account of the coalition forces that 
have actually liberated Iraq, so that account may attempt to 
bring a better life much more quickly to the people of Iraq 
today. I am told that it takes 6 months just to process the 
paperwork for requests for funding under the current program.
    I want to commend President Bush for saying that sanctions 
should be lifted and that the oil wealth of Iraq should stay 
with the Iraqi people, and its sales will not continue to go 
through the Oil for Food Program. The newly freed people of 
Iraq should not be saddled with a program designed for another 
time, with contractual obligations made by a previous regime, 
with a payment schedule that deprives them of the full fruit of 
their own natural resources. Until a new Iraqi Government can 
be formed, the United States and its coalition partners should 
manage the sale of oil for the people of Iraq without diverting 
money from sales, as the U.N. program has done in the past.
    I want to thank the witnesses for their testimony today, 
and I look forward to hearing it.
    With that, I would recognize our ranking member, Mr. 
Boucher of Virginia, for an opening statement.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    The Oil for Food Program was established by the United 
Nations in April 1995 as a means of alleviating human suffering 
in Iraq, while seeking Iraqi compliance with a variety of 
United Nations' resolutions. The implementation of the program 
began in December 1996, and the first food shipments to Iraq 
arrived in March 1997.
    The program has undergone a number of changes in the 
intervening years, including increases in the amount of oil 
that Iraq has been permitted to export under its guidelines. 
Under the program's guidelines, the revenues generated from the 
sale of Iraqi oil are distributed based upon a formula that 
allocates the largest portion of the revenues for reparations 
of the victims of the invasion of Kuwait and for humanitarian 
supplies and equipment. According to the United Nations, as of 
May 7 of this year, $26.8 billion worth of humanitarian 
supplies and equipment have been sent to Iraq under the 
program, and another $10.1 billion of supplies are now in the 
process of being approved and shipped.
    The Oil for Food Program is set to expire on June 3, 2003. 
Given the recent war and the numerous concerns that are 
associated with the restoration of Iraq, and the numerous 
concerns that have been voiced from a variety of sources 
concerning the operation of this program, it seems to me that 
this hearing is well-justified. I want to commend the Chairman 
for bringing this matter before the subcommittee in a timely 
way.
    The administration and the United Nations are appropriately 
considering at the present time whether there is a continuing 
need for the Oil for Food Program in post-war Iraq. Today, we 
have before the subcommittee three witnesses who can testify 
regarding the program and the effect that continuing or ending 
the program will have on Iraq and world energy markets. I very 
much look forward to this testimony and I join with you, Mr. 
Chairman, in welcoming these witnesses.
    Thank you. I yield back.
    Mr. Barton. We thank you.
    We will now receive an opening statement from the full 
Committee Chairman, Mr. Tauzin of Louisiana.
    Chairman Tauzin. Thank you, Mr. Chairman.
    First of all, I think it's important to identify the basis 
upon which this hearing is, in fact, called and executed. It is 
obviously one connected directly to this country's concerns 
about not only its domestic but international oil policy. That 
is obviously a subject before this Committee.
    Second, this Committee continues to have jurisdiction over 
foreign commerce, and obviously this is a huge interest to the 
foreign commerce of the United States and its global trading 
partners.
    Let me first say, Mr. Chairman, that your timing couldn't 
be better. I mean, as the U.N. is beginning to focus on and 
face this issue, it is important that the Congress and the 
United States have a full accounting of how this program has 
worked and whether or not it should be allowed to expire a 
natural death on June 3 of this year, when it is scheduled to 
expire.
    Let me lay the facts down as we see them and as we have 
your written testimony before us today, and I want to thank all 
the witnesses who have come today to help us understand this 
issue.
    First is that, just yesterday, crude oil prices closed up 
$1.15 a barrel, to a high of $28.50 again. Natural gas prices 
in America were $5 Mcf. We continue to see high oil and natural 
gas prices in our U.S. economy struggling to recover. I can 
tell you from the oil patch that those who want to make 
investments in the oil patch look at these prices and 
understand they're phony.
    It is still based upon some real artificial disruptions in 
the international oil markets. When oil prices are unnaturally 
high, investors in the oil patch restrain from investing, 
because they know they're going to come down when conditions 
normalize again. So, for those two reasons, we have great 
concerns. These continued high prices impact the desire of this 
country to seek economic recovery and in some parts of the 
country is threatening closure of some industries and 
businesses because natural gas prices are so exceptionally 
high.
    Second, the people who ought to be investing in more 
natural gas and oil production in this country are restraining 
their investment until these markets normalize. So we have 
great interest in normalizing international oil markets again.
    Third, as I understand it, the Iraqi oil industry is in 
terrible state of disrepair. It's in bad shape following this 
war. The people of Iraq desperately need the sale of their own 
oil in order to rebuild their country and to provide 
humanitarian assistance to people who depend upon that 
assistance in a country just wreaked with war.
    And yet the U.N. still is defending this Oil for Food 
Program, which was designed, as I understand it, to allow money 
to go to humanitarian assistance, and we're seeing some real 
problems in that administration. But it also was to fund the 
inspectors. The question remains: should Iraq have any 
sanctions on it today, should it be able to renew its oil 
production and sale of oil to the world community so that it 
can recover economically, and so that humanitarian aid can be 
provided to its people with its own money, or should the U.N. 
continue this Oil for Food Program that is now the subject of 
so much criticism and was designed to try to get inspectors 
into the country to find out what Saddam was up to in terms of 
weapons of mass destruction.
    It seems to me that this program is a program whose day has 
come. We ought to let it expire a natural death, but more 
importantly, we ought to get this country back on its feet as 
quickly as we can in terms of oil production--for two reasons: 
one for the sake of the Iraqis, who need their own assets to 
rebuild their own country, and to provide, as I said, 
humanitarian assistance for their own people, but second, to 
normalize the conditions of the global oil markets again, so 
that we can get back down to normal investments and normal 
production, and hopefully normal prices again in the 
marketplace.
    Most of the people I talk to tell me that oil prices should 
probably be in the low 20's right now, and that these high 
prices are still a result of these uncertainties and the 
diplomatic maneuvering going on at the U.N. The sooner we can 
end that and get the normal marketplace again, the faster this 
country can be back on the road to recovery.
    Thank you, Mr. Chairman, for examining this, and thank you 
for coming to help us understand it, because what happens in 
this area is not only going to dramatically affect what happens 
in Texas and Louisiana and the oil patch of this country; it's 
going to dramatically affect the economic recovery of our 
country and, frankly, parts of the world that are desperate 
right now to see some economic recovery.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Chairman Tauzin.
    Does Mr. Brown wish to make an opening statement?
    Mr. Brown. I do, Mr. Chairman.
    Mr. Barton. Okay. The gentleman is recognized for 3 
minutes.
    Mr. Brown. Thank you for putting this hearing together. I 
thank the panel.
    The Bush administration recently proposed that the U.S. 
maintain control over Iraq's oil reserves until our country 
determines it's safe to leave those resources in Iraqi hands. 
This move is yet another reminder of the staggering influence 
that energy companies have over this administration's policy.
    We know that Vice President Cheney ran the oil conglomerate 
Haliburton until Governor Bush tapped his fellow Texan to be 
his running mate 3 years ago. Haliburton and its French 
subsidiary had over $73 million in contracts with Saddam 
Hussein's Iraq as recently as the year 2000. Most of us know 
that the Bush administration abandoned the competitive bidding 
process to ensure that Haliburton's subsidiary got a lucrative 
Iraqi oil field reconstruction contract during the war. That 
contract may be worth yet as much as $7 billion.
    The most obvious example of the energy industry's influence 
over the Bush administration is the almost total secrecy the 
White House has imposed on the records of Vice President 
Cheney's Energy Policy Task Force. Their obsession with secrecy 
in this case is certainly understandable. If I were to allow 
the American Petroleum Institute and the National Mining 
Association and the Nuclear Energy Institute and the Edison 
Electric Institute to write my energy plan, I wouldn't want the 
word to get out, either. But you really have to wonder, if the 
process is so embarrassing that you have to keep it secret, can 
the resulting policy be much better?
    As we look back on this record of favor for the energy 
lobby, it's little surprise that the administration proposes to 
assert more formal and direct control over Iraq's oil 
infrastructure. It's good we're going to talk today about the 
future of Iraq and her oil assets, but I think we're missing 
the most important part of the conversation. The Bush 
administration's influence over oil in Iraq is an important 
issue, but for American taxpayers, the oil industry's influence 
over the Bush administration, frankly, is a much more important 
one.
    Thank you, Mr. Chairman.
    Mr. Barton. You still have a minute now.
    Mr. Brown. I'm yielding it back.
    Mr. Barton. Okay. I didn't hear much about the purpose of 
the hearing in your opening statement, but it sure sounded 
sincere.
    Mr. Brown. Since when did the chairman begin to comment on 
opening statements of other members?
    Mr. Barton. I was just so overcome with affection for the 
gentleman from Ohio, and his appearance here----
    Mr. Brown. I appreciate that, my friend from Texas.
    Mr. Barton. Who's next? Mr. Whitfield, do you wish to make 
an opening statement?
    Mr. Whitfield. Mr. Chairman, I feel speechless at this 
point.
    Mr. Barton. All right. So you'll get an extra 3 minutes on 
your first round of questioning.
    Does Mr. Wynn wish to make an opening statement?
    Mr. Wynn. Yes, Mr. Chairman, briefly.
    Mr. Barton. The gentleman is recognized for 3 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. I appreciate you calling 
this hearing on what I think is a very important issue, given 
what we've already accomplished in Iraq and the need to ensure 
that our military accomplishment is not over-shadowed by 
unsuccessful reconstruction, I guess is the best way I would 
characterize it.
    One of the premises, it seems to me, that was raised in 
connection with the war in Iraq was that, yes, there will be 
devastation, but we have a greater opportunity to rebuild 
because Iraq has its own resources, namely, oil. It remains to 
be seen whether we can efficiently put those resources to work 
to rebuild Iraq.
    Specifically, let me turn to the Oil for Food Program that 
in the 1990's alleviated some of the worst effects of the 1991 
Gulf War, the international sanctions regime. The program 
basically allowed Iraq to export limited amounts of oil in 
return for food, medical supplies, new construction and other 
significant items.
    I think that was a good idea. The goal of the program was 
to prevent the oil revenue from being used to expand Iraq's 
weapons of mass destruction program, but allow for food and 
other necessities to be funneled into Iraq, again using its own 
resources.
    However, now that the country has been liberated, the 
program may, in fact, not be necessary. However, should the 
program continue for several months, as the U.S. has proposed 
before the United Nations, we should examine--and this is where 
I believe we have a true responsibility--we should examine ways 
to ensure transparency with respect to the financial 
transactions and the independent external audit program.
    It seems to me that the World Bank and International 
Monetary Fund, organizations which have experience in this 
area, could play a role to oversee how these revenues are spent 
to ensure they are spent for the good of the Iraqi people. In 
addition, there should be a limited U.N. role to appoint 
auditors to oversee some of these financial transactions, again 
to ensure that the benefit goes to the Iraqi people.
    Now, this is a fairly new resolution and we have not had a 
lot of opportunity to examine it, but I think there are a lot 
of questions that, hopefully, our witnesses and this committee 
will consider. For example, should this resolution be adopted, 
how will we ensure a smooth transition away from the Oil for 
Food Program as administered by the United Nations without 
compromising humanitarian assistance for Iraqis. I think it 
goes without saying that our reconstruction efforts thus far 
have not been a model of success. Hopefully, any transition 
would be much more effective.
    Second, how soon will Iraq be able to export significant 
oil and generate revenue, given the poor oil-producing 
infrastructure in place from years of sanctions and looting? 
That's another consideration that I hope this committee will 
consider.
    Just to reflect on the humanitarian situation, I would 
point out that the World Health Organization announced at 
Basra, Iraq's second largest city, could experience an outbreak 
of cholera from untreated sewage that is spewing into the 
river, and there is still nightly violence in the streets of 
Baghdad. It seems to me that rebuilding Iraq quickly and 
effectively, using its own oil resources, is very important, so 
that the average Iraqi is better off without Saddam, definitely 
without Saddam.
    It will help show the Arab streak, which I think is very 
important in our overall foreign policy, and the rest of the 
world, that we are not just interested in oil but we're 
interested in the welfare of the Iraqi people.
    Mr. Chairman, I appreciate your attention to this matter 
and I look forward to today's witnesses.
    Mr. Barton. We thank the gentleman from Maryland.
    Does the gentleman from Oregon wish to make an opening 
statement?
    Mr. Walden. Mr. Chairman, I'm going to waive my opening 
statement in lieu of questions.
    Mr. Barton. The gentleman defers.
    Does the distinguished gentleman from Texas wish to make an 
opening statement?
    Mr. Hall. Are you talking to me?
    Mr. Barton. Yes, sir. You're the only distinguished 
gentlemen from Texas that I know of in the room, at least at 
the dias.
    Mr. Hall. How about you?
    Mr. Barton. Well, I'm not distinguished.
    Mr. Hall. Well, I thank you, Mr. Chairman. I thank this 
fine group for coming before us here with the great job that 
they have done. I agree with a lot of the statements Sherrod 
Brown made, and Mr. Wynn.
    I would relegate the U.N. on the basis of reporting to them 
what we did, because we have to have some international 
organization, but with the total lack of support that they gave 
us, I think we owe them very little. For the pseudo-leaders of 
Iraq that are trying to make demands on us now, I think they 
need to once again know that they supported a dictator for 
many, many years, and also remind them that they lost this war, 
they didn't win it, and they need to be careful with their 
demands.
    I noted on the television this morning that we had given 
some instructions to shoot the looters. I think that's long 
been delayed. As Congressman Brown said, and Mr. Wynn, we 
absolutely have to win this peace now. The most important part 
of this war is probably in front of us. I think it's 
appropriate to hold this hearing this morning, to reassess the 
Oil for Food Program, which I've been opposed to from the time 
it was undertaken, as I think the Chairman has. We've had a 
bill to try to stop it one time. I don't remember what happened 
to it. I don't think we could ever get it out of subcommittee.
    But with the demise of the regime over there, there is 
clearly no further need to continue this program. It will be 
continued in some way, but I guess melded in with our overall 
thrust to try to get that country straightened out.
    A lot of questions remain to be answered in the 
transitional phase we're now in and about to ultimately deliver 
the Iraqi oil assets to whatever successor government is 
established. I wish and hope that we could deliver part of that 
oil assets to the American people. That's what the world is 
accusing us of, and that's exactly what every other conqueror 
probably would do. We need to pay the American taxpayer back 
for the cost of this war, with at least half of the energy that 
we produce from Iraq, and take the other half to build them 
back.
    I don't know how possible that is, but I think that's what 
all the people in my district are saying, that we think they 
ought to pay for the war that they created, that they brought 
on themselves, and they have the assets to do it with.
    While we're looking for Saddam Hussein, and looking 
everywhere for him, we ought to also look for one child that 
that program probably helped. I doubt seriously if they're 
going to find it. I think one child that benefited from what I 
think is a diabolical deal that the U.S. carried out with an 
international thug that they now look for. I want to find some 
proof that that helped. I hope I find it there, because I hope 
it did help youngsters and help people who were ill and needed 
it, but I have real doubts about it.
    We also need to be mindful of how closely our actions with 
respect to Iraqi oil are being watched by the Arab world, and 
might let them know there's not a hell of a lot of their 
business as to what we do with it and how we handle it. They 
need to know that we won the war without their help, we won the 
war without the help of the United Nations, and while we have 
to have some type of an international organization--I'm not 
saying pull out of the United Nations, or that old saying of 
let China in the U.N. and let's give them our spot, you know, 
and all that that went on for a long, long time. But I think 
that, as we're here today, many if not most of the Arab nations 
believe that we're in Iraq for the oil, to take the oil for our 
own use as spoils of war, because that's exactly what they 
would do. Of course, it's not true, but perceptions are vitally 
important to our long-term success in the government.
    Mr. Barton. The gentleman needs to wrap up. He's about 2 
minutes over.
    Mr. Hall. Well, I could go on forever.
    Mr. Barton. I know you could. That's why I'm asking that 
you wrap up.
    Mr. Hall. I'm surprised that you would even slow me down, 
Mr. Chairman.
    Mr. Barton. Mr. Brown gave you his extra minute. He just 
did.
    Mr. Hall. Just as this Nation pulled together behind the 
troops when they went into Iraq, we need to stay together and 
support this President during this transition. I have a lot of 
support for the President and a lot of belief in the President, 
not only that he's capable and honest, and he is our former 
Governor and a friend of mine, and a godly man, and I hope the 
transition is going to be short. But it's important that we 
take the time to do it correctly, and if we're not successful 
in bringing about the establishment of a stable Iraqi 
government, then our efforts to topple Saddam Hussein's regime 
may have been in vain.
    Mr. Chairman, I yield back the balance of my time.
    Mr. Barton. That's pretty good for a one paragraph staff 
briefing, to talk for 5 minutes. That's a very good statement.
    Mr. Hall. Thank you, Mr. Chairman.
    Mr. Barton. The President also did a birthday party for 
you, I'm told, in the Oval Office. So you and he must be pretty 
good friends.
    Mr. Hall. Well, we are very good friends, but I would have 
to be truthful with you, as my fellow Texan and the chairman, 
that I'm not 80 years old. It's embarrassing to tell that now 
after they gave me parties all over this town. But I lied to 
get in the Navy 55 years ago. I was flying for the Navy when I 
was 13.
    That's my story and, by golly, I'm going to stay with it. 
Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    Mr. Otter, do you wish to make a statement?
    Mr. Otter. I will defer.
    Mr. Barton. He defers.
    Mr. Hall. Mr. Chairman?
    Mr. Barton. The gentleman from Texas.
    Mr. Hall. I also want to thank Jim Barnes here from the 
James A. Baker Institute. It's a great institute. It is named 
after a great American that I thought should have been 
Secretary of State under the new Bush here, and I'm 
disappointed that he wasn't.
    Thank you. I yield back.
    Mr. Barton. Does Mr. Shimkus with to make an opening 
statement?
    Mr. Shimkus. No, sir.
    Mr. Barton. Does Mr. Burr wish to make an opening 
statement?
    Mr. Burr. No, sir.
    Mr. Hall. I can make another one if you would allow me----
    Mr. Barton. No, no.
    Seeing no other members present, all other members will 
have their opening statements, if they wish, to have them put 
into the record.
    [Additional statements submitted for the record follow:]

Prepared Statement of Hon. Vito Fossella, a Representative in Congress 
                       from the State of New York

    Today's hearing examines a topic crucial to the development of 
post-Hussein Iraq: the UN Oil for Food Program. Allowing for the free 
flow of Iraqi oil into the world market, with profits directed towards 
the people of Iraq, is arguably the single most important initiative 
dictating the future of the Iraqi economy and the betterment of a 
historically oppressed people. However, economic prosperity cannot 
occur under a command and control framework formerly established to 
prevent a brutal dictator from building weapons of mass destruction. In 
a post Hussein Iraq, it is imperative we revisit and rescind antiquated 
regulations so that a new Iraq can prosper.
    As one of our witnesses accurately states, ``The Oil for Food 
Program was created for the purpose of stopping the regime of Saddam 
Hussein from acquiring funds to purchase weapons of mass destruction 
and further expand its traditional military might. With the fall of 
Saddam's regime, the purpose of this program no longer exists. It 
should be phased out.'' Not only is the program outdated, it has 
historically been abused through inept UN oversight. In addition to its 
ridiculous appointments of terrorist nations to key international 
committees, the UN has proven insolvent in administering a program that 
was supposed to provide humanitarian relief to the people of Iraq.
    In testimony before the House Financial Services Committee, the 
Treasury Department highlighted Hussein's success in ``skimming and 
kickbacks on oil legitimately sold through the Oil for Food Program.'' 
The Department also notes Saddam's equal victories in defrauding the 
Program's humanitarian purchases. In addition, testimony from the 
Center for Strategic and International Studies, Robert E. Ebel notes, 
``from the beginning of the program--Iraq awarded contracts to 
potentially sympathetic permanent members of the UN Security Council, 
primarily France, Russia, and China.'' Mr. Ebel goes on: ``Because Iraq 
primarily award(ed) contracts based on politics rather than the quality 
of the goods, the Iraqi people have often received inferior goods, 
including medicines.'' These grave abuses all happened on the UN's 
watch. This alleged defender of the international community seemed more 
intent on financing inactive weapons inspectors than purchasing food 
for the Iraqi people--a cause receiving only 25% of Oil for Food funds. 
It is an insult to human dignity and freedom to even consider 
continuing the program under the auspices of an organization seemingly 
indifferent to atrocities against humanity.
    I look forward to hearing this panel's ideas on how to gradually 
replace the Oil for Food Program with a stable model for Iraqi economic 
development, overseen by viable international financial institutions. 
Striving towards such a goal is a critical next step in rebuilding Iraq 
and the liberation of a noble people.
                                 ______
                                 
 Prepared Statement of Hon. Mike Rogers, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for holding this important hearing as we 
discuss the future of Iraq and the current Oil for Food Program that I 
believe is harming the Iraqi people.
    During my recent travel to Iraq, I learned first hand of the 
difficulty the current United Nations' Oil for Food Program is having 
on Iraqi citizens and to coalition efforts to rebuild the nation. From 
this experience, I came away with two primary reasons, in addition to 
those suggested at today's hearing, that the United Nations ought to 
end the Oil for Food Program in Iraq.
    First, there are thousands of barrels of Iraqi oil in full tankers 
in the region ready to enter the market. However, due to the Oil for 
Food Program, the Iraqi people are unable to benefit from the sale of 
these resources, therefore this untapped source of revenue remains 
locked in tankers due to a bureaucracy put in place to offer relief to 
the Iraqi people from Saddam Hussein's cruelty, though his regime is no 
longer in power in Iraq.
    My second concern over this program is the effect it is having on 
the lives of every-day Iraqi citizens. Propane, a derivative of 
petroleum, is a primary source of residential fuel throughout Iraq. 
Families use propane to cool their food, cook and heat water. In part 
due to the existence of the Oil for Food Program, propane is not being 
derived from Iraqi petroleum reserves and significant amounts of 
propane are currently having to be imported into the nation simply to 
avert a humanitarian crisis.
    Mr. Chairman, thank you for again for convening this hearing. I 
look forward to working with you as we aim to assist Iraq and her 
people transition to a free state.

    Mr. Barton. We now want to welcome our panel. We have Mr. 
Guy Caruso, who is the Administrator for the Energy Information 
Administration here in Washington, DC. We have Mr. Robert Ebel, 
who is Director of Energy and National Security, Center for 
Strategic and International Studies, also here in Washington, 
DC. And as has just been pointed out, we have Mr. James Barnes, 
who is a research fellow at the James A. Baker Institute for 
Public Policy of Rice University in Houston, TX.
    Gentleman, because we only have one panel, we're going to 
start with Mr. Caruso, give you such time as you may consume, 
but hopefully you can do it in around 7 minutes, 5 to 7 
minutes, and Mr. Ebel and Mr. Barnes, but we're not going to 
put the clock on you because, unlike some of our hearings where 
we have two or three panels with five or six people, you're our 
witness list today so we'll give you as much time as you need 
to elaborate on your opening statement.
    Welcome to the committee. You are now encouraged to tell us 
about your testimony, Mr. Caruso.

STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
  ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; ROBERT E. EBEL, 
      DIRECTOR, ENERGY PROGRAM, CENTER FOR STRATEGIC AND 
 INTERNATIONAL STUDIES; AND JAMES J. BARNES, RESEARCH FELLOW, 
JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY

    Mr. Caruso. Thank you, Mr. Chairman, and members of the 
committee. I am Guy Caruso, the Administrator of the Energy 
Information Administration.
    Mr. Barton. You really need to speak into that microphone 
so we can hear you.
    Mr. Caruso. Okay. I appreciate the opportunity to appear 
today on this very important subject, as we have seen and 
heard. My focus will be on the impact of Iraq and its return to 
the oil market, and the outlook for the world oil market as 
published in the EIA ``Short-Term Energy Outlook'' of this 
month.
    As you know, EIA is a policy-neutral, statistical arm, an 
analytical arm of the Department of Energy. We do not take 
policy stances, but our analysis and data is used by our 
Department and others in making policy decisions.
    Iraq is, of course, critical to the world oil market. 
Following disruptions in supply over this past winter coming 
from Venezuela, Nigeria, and then in the spring, Iraq, the 
reductions in inventory is to low levels in the United States 
and elsewhere. We now feel that the world supply prospects over 
the next several months look quite good and we expect there 
will be an increased supply from Iraq. The pace at which it 
comes back, of course, is uncertain, but we are hearing very 
positive things from those who are now in charge of the Iraqi 
oil ministry.
    We have seen already crude oil prices come down from the 
high just prior to the war, and as Chairman Tauzin mentioned, 
there was a great deal of uncertainty over the winter period 
after the Venezuelan disruption and with the anticipation of 
Iraq, and oil prices had reached nearly $40 a barrel on the 
spot market. As Chairman Tauzin mentioned, it is $28.50 today, 
so it's down quite a bit from the high, but clearly, still 
there is uncertainty.
    We think the improvement that's needed to bring inventories 
back will take time, and crude oil prices still are anticipated 
to average in the $27 to $28 range in the near term, according 
to our latest short-term energy outlook.
    OPEC producers with spare capacity, in particular Saudi 
Arabia, have increased production above quotas in recent 
months, and have made up substantially for the lost production 
from these disrupted areas, starting with the Venezuelan 
disruption through Iraq. Under our base case, we assume 
production from Iraq is restored toward normal levels by the 
end of the year, and that other oil producers, particularly 
OPEC members, will accommodate this return to the market over 
these coming months by lowering output; therefore, we do not 
anticipate large downward pressure on prices over this short-
term period.
    On April 24, OPEC ministers raised their official quotas 
for their members, excluding Iraq, to bring their quota back 
into line with what they believe their actual production should 
be. Their production was running several million barrels a day 
above the quotas they had set in January of this year. The OPEC 
members are seeking a tighter compliance with their quotas and, 
as I mentioned, bringing production back toward the new quotas.
    In our base case, we expect these measures to result in an 
average total OPEC crude oil production rate of about 26.7 
million barrels a day over the next several quarters, and 
individual OPEC member countries' shares of this output level 
will depend upon the speed with which Iraqi production recovers 
and returns to the market, through whichever means is 
determined in the deliberations that are going on in the U.N. 
and elsewhere right as we speak.
    Reflecting the OPEC production cutback in 2002, and the 
impact of the Venezuelan disruption late last year, oil 
inventories remain at the lower end of the normal averages we 
have seen now and have been tracking for the last 5 years, not 
only in the United States but throughout the OECD countries. So 
this is a global issue with respect to the oil market. Low 
inventories, however, are expected to recover, but slowly, over 
the next year.
    Although low inventories remain a concern, there are 
several points that I believe are relevant at this time. First, 
the actual and projected stock levels are still higher than the 
record lows, and they are above the minimum estimated by the 
petroleum industry needed to maintain the logistical systems in 
a smooth fashion.
    Second, the stock figures I mentioned are commercial 
inventories only. They exclude a substantial Strategic 
Petroleum Reserve of 600 million barrels of crude, and another 
2 million barrels in heating oil.
    Third, the refineries and, indeed, the industry's 
logistical system has proven once again the resiliency to deal 
with the kinds of disruptions we've seen and the uncertainty 
that we've seen. Refineries, as a result of upgrading and 
debottlenecking, have displayed an increasing flexibility to 
increase output during this time of uncertainty. Indeed, the 
return of Iraq would increase that flexibility.
    Finally, the product imports we have received not only from 
Europe but from the Caribbean refineries also add to the 
flexibility and ability to return inventories to normal levels.
    Let me conclude with some remarks about oil prices. Crude 
oil prices for April averaged $28 per barrel on a WTI or West 
Texas Intermediate basis. That's about $5 lower than in March. 
As the market reacts to prospects for greater supplies from 
Iraq, and the return of Nigerian and Venezuela to full 
production, we expect these prices will trend downward over the 
following three quarters of this year.
    As I mentioned, this price of $28 is nearly $12 lower than 
the peak reached prior to the war. We expect stabilization and, 
depending on the timing of that, of course, it will depend upon 
the pace at which Iraq returns.
    The interim head of the oil ministry of Iraq, Thamir 
Ghadhban, has said this week that Iraqi oil production should 
be about 1.5 million barrels a day by the end of June, which 
would enable about a million barrels a day of exports, and 
should return to its prewar levels of 2.5 million barrels a day 
by the end of the year. We also anticipate returns, as I 
mentioned, up to normal levels in Nigeria and in Venezuela.
    So our base line estimate assumes OPEC members will cut 
back and accommodate this return at these levels that I 
mentioned, but that OPEC production will be sufficient to allow 
these commercial inventories that have been drawn down over the 
winter period to return to more normal levels. We expect over 
the longer term, an 18-month period, that WTI prices will fall 
between the $20 and $25 range that Chairman Tauzin mentioned in 
his opening remarks.
    In the very near term, what this means is that summer 
gasoline prices will actually be a bit lower than we had been 
anticipating just a month ago. We now expect them to average 
about $1.46 a gallon, and that trend downward to continue.
    So, with that brief overview of our short-term outlook, Mr. 
Chairman, I would be happy at the appropriate time to answers 
any questions you or the committee members may have.
    [The prepared statement of Guy F. Caruso follows:]

Prepared Statement of Guy F. Caruso, Administrator, Energy Information 
                  Administration, Department of Energy

    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to summarize the world oil 
market outlook between now and the end of 2004. The source of these 
projections is the most recent release of the Short-Term Energy 
Outlook, published by the Energy Information Administration (EIA). 
These releases are updated monthly.
    The EIA is the statutorily chartered statistical and analytical 
agency within the Department of Energy. We are charged with providing 
objective, timely, and relevant data, analysis, and projections for the 
use of the Department of Energy, other Government agencies, the U.S. 
Congress, and the public. We do not take positions on policy issues. We 
produce data and analysis reports that are meant to help policy makers 
determine energy policy. Because we have an element of statutory 
independence with respect to the analyses that we publish, our views 
are strictly those of EIA. We do not speak for the Department or for 
any particular point of view with respect to energy policy, and our 
views should not be construed as representing those of the Department 
or the Administration. EIA's baseline projections on energy trends are 
widely used by Government agencies, the private sector, and academia 
for their own energy analyses.
    World Oil Markets. The April 24 meeting of the Organization of 
Petroleum Exporting Countries (OPEC) raised official quotas for members 
(excluding Iraq) by 0.9 million barrels per day from the previous 
(suspended) quota to 25.4 million barrels per day. OPEC members also 
sought tighter compliance with quotas, calling for production cuts of 2 
million barrels per day from April levels. We expect these measures to 
result in an average total OPEC (including Iraq) crude oil production 
rate of about 26.7 million barrels per day in the second and third 
quarters. Individual OPEC country shares of these output levels will 
depend upon the speed with which Iraqi production recovers through 2003 
and the extent to which Nigerian and Venezuelan production return to 
more normal levels (Figure 1).
    Crude Oil Prices. Average crude oil prices for April fell about $5 
per barrel from March averages. The market reacted to prospects for 
greater oil supplies from Iraq, Nigeria and Venezuela as well as OPEC's 
surprise increases in production quotas. For example, West Texas 
Intermediate (WTI) spot prices averaged about $28 per barrel in April, 
$5 per barrel lower than the March average, and by end-April WTI prices 
were $12 per barrel lower than levels reached just two months earlier 
in anticipation of the start of the war in Iraq (Figure 2). Prices have 
since stabilized as people realize that, while the war was quick, it 
may take several months for Iraqi oil exports to resume in large 
volumes. Oil markets will be watching how other OPEC members respond to 
the return of supplies from Iraq, Nigeria and Venezuela. EIA's baseline 
outlook assumes that OPEC production will be sufficient to allow 
commercial oil inventories in the Organization for Economic Co-
operation and Development (OECD) countries to build from their current 
very low levels (Figure 3), but that OPEC will cut back production to 
accommodate the return of Iraqi oil exports. Until these inventories 
are rebuilt above observed 5-year lows, WTI oil futures prices should 
remain around current levels and then gradually slide toward about $24 
per barrel by the end of 2004 as Iraqi oil exports return. These 
projections always assume that OPEC members will completely accommodate 
a return of Iraqi exports with no regard to the timing and the volumes 
that are produced.
    International Oil Supply. OPEC crude oil production (including 
Iraq) fell by 0.9 million barrels per day in April to below 27 million 
barrels per day, as further production increases from the OPEC 10 were 
not sufficient to offset the loss of Iraqi production following the war 
in that country. OPEC production is expected to remain at about the 
same level in May before declining in response to OPEC's efforts to 
adhere to the new production quotas in June. However, even with this 
cutback, year-over-year increases of 1.1 million barrels per day for 
OPEC crude oil production are still expected for the third quarter 
(albeit from low 2002 levels). This trend, combined with an expected 
aggregate increase in non-OPEC supply in 2003 of 1.1 million barrels 
per day, indicate a total world oil supply increase in 2003 of 2.5 
million barrels per day, which is expected to allow for a global stock 
build this year.
    Figure 4 depicts U.S. crude oil, motor gasoline and distillate 
inventories. Although reflective of the international picture as 
previously described, the figure shows that, for the next several 
months, supplies are going to be tighter than normal. Projected stocks 
are either at or below the lower ends of their respective 5-year 
average ranges. In response to low prices at the beginning of 2002, 
OPEC tightened production for much of that year. In addition, the 
impact of the Venezuelan disruptions has been relatively larger in the 
U.S. than elsewhere. These are likely to contribute to the tightness of 
stocks during the next several months even though OPEC has been raising 
its quotas and Venezuelan production has partially recovered from its 
recent lows. Inventories are expected to recover only slowly during the 
forecast interval. Although the low inventory levels are a source of 
concern, the following points should be noted.
    First, the actual and projected stock series are still higher than 
their record lows and above the minimum estimated by the petroleum 
industry to minimize the likelihood of interruptions in the 
distribution of products to the retail level. Second, the stock figures 
shown here are commercial inventories only: they exclude stocks in the 
Strategic Petroleum Reserve, currently containing 600 million barrels, 
and the Federally mandated Regional Petroleum Reserve of heating oil 
stocks in the Northeast, currently standing at 2 million barrels. 
Third, refineries, as a result of several years of upgrading, have 
displayed increasing flexibility in increasing output during periods of 
low inventories. Fourth, product imports are, and will continue to be, 
readily available from both Caribbean and European refineries.
    Thank you, Mr. Chairman and members of the Committee. I will be 
happy to answer any questions that you might have. Attached to this 
statement is a complete copy of the most recent Short-Term Energy 
Outlook on which this testimony is based. The Outlook is also 
accessible on the internet on the Energy Information Administration's 
website http://www.eia.doe.gov.

[GRAPHIC] [TIFF OMITTED] T7486.001

[GRAPHIC] [TIFF OMITTED] T7486.002

    Mr. Barton. Thank you.
    Mr. Ebel, we will recognize you for such time as you may 
consume.

                   STATEMENT OF ROBERT E. EBEL

    Mr. Ebel. Thank you very much, Mr. Chairman.
    Mr. Chairman, my name is Robert Ebel. I direct the Energy 
Program for the Center for Strategic and International Studies. 
I want to thank you for the opportunity to speak on the United 
Nations Oil for Food Program, and to comment on its 
effectiveness, its impact on oil markets, and whether it should 
be continued.
    Resolution 986 of the United Nations Security Council, 
passed in 1995, authorized the export of Iraqi oil, with the 
revenues earned to be spent to meet the humanitarian needs of 
the Iraqi people. This approach became known as the Oil for 
Food Program.
    The program, in effect, did not limit Iraqi oil sales; 
rather, the limitation was the Iraqi producing capacity, and I 
would add that that producing capacity has been declining by 
the equivalent of about 100 barrels per day every year.
    According to a recent CSI report, since the program began 
in December 1996, Iraq has exported 3.3 billion barrels of oil 
valued at $62 billion. The report notes that over a quarter of 
the oil revenue pays for compensation costs associated with the 
Gulf War, the U.N. administrative costs, and the costs of U.N. 
weapons inspectors. Of the funds provided to Iraq out of the 
U.N. escrow account, only 25 percent have been allocated to 
purchasing food. The remaining 75 percent were allocated across 
23 different sectors and involved at least 13 different Iraqi 
government ministries. The report also notes that the Sanctions 
Committee had approved just $3.6 billion in oil industry spare 
parts.
    Again referencing the CSI report, from the beginning of the 
program until mid-2000, Iraq awarded contracts to potentially 
sympathetic permanent members of the U.N. Security Council, 
primarily France, Russia and China. In that year of 2000, Iraq 
began to focus on strengthening ties with its neighbors. As 
public opinion against sanctions grew and oil revenue 
increased, Iraq increasingly favored Egypt, the United Arab 
Emirates and Jordan for supply contracts. But because Iraq 
primarily awards contracts based on politics rather than the 
quality of the goods, the Iraqi people have often received 
inferior goods, including inferior medicines.
    Mr. Chairman, assessing the Oil for Food Program is a 
somewhat difficult task, complicated by the fact that the 
United Nations does not publish contract or supplier data, but 
other reports indicate, not surprisingly, that the two top 
suppliers to Iraq under approved contracts in the program have 
been France and Russia.
    The Oil for Food Program was shut down by military 
intervention by the coalition forces, but then resumed under 
the supervision of the U.N. Secretary General, spending funds 
already accumulated. Food and other aid are being provided by 
funds earned from earlier oil sales, but deliveries have been 
discouragingly slow, largely because of bureaucratic 
entanglements.
    The program is scheduled to end, as we have noted, on June 
3, but a resolution just introduced by the United States, and 
supported by Great Britain and Spain, proposes that the program 
be phased out over a period of 4 months. The resolution 
foresees continuation of the delivery of priority civilian 
goods under contracts already approved.
    While the volumes of oil exported from Iraq under the Oil 
for Food Program may appear substantial, the role these volumes 
have played in the world oil market have not been pivotal. 
Taking into consideration the oil smuggled out of Iraq, 
probably on the order of 400,000 barrels per day, equal to 
Iraqi oil consumption itself, Iraqi oil was accounting for just 
some 3 percent of total world oil supply.
    The run up in the world oil price proceeding military 
intervention should not be attributed solely to the prospect of 
Iraqi oil being lost. Rather, the price run up may be traced to 
the prospect that a worst case scenario might develop when 
military intervention in Iraq came about a worst case scenario 
under which we would have not only the loss of Iraqi oil, but 
massive numbers of oil wells set afire, plus you would have 
sabotage in Saudi Arabia and in Kuwait by supporters of Saddam, 
in turn taking additional oil volumes off the market. Of 
course, Venezuela oil exports had not yet returned to normal.
    Mr. Chairman, my reading of the resolution submitted to the 
Security Council gives me the strong impression that the 
coalition is exercising its powers and responsibilities under 
the Geneva Convention. Stated simply, an occupying power can 
export Iraqi oil and use the income for humanitarian purposes 
inside Iraq, and additionally, can use the income to pay for 
the costs of occupation, but not the costs of the war. Under 
the Oil for Food Program, legal title to the oil was guaranteed 
by the United Nations, whereas the resolution offered, if 
approved by the Security Council, gives the occupying powers 
the legal title that can be transferred to potential buyers.
    Mr. Chairman, I have a longer statement that examines the 
position of Iraqi oil today and tomorrow, and I ask your 
permission to submit that statement for the record.
    Mr. Barton. Without objection.
    Mr. Ebel. That concludes my oral statement, Mr. Chairman, 
and I look forward to any questions you or your members may 
have.
    [The prepared statement of Robert E. Ebel follows:]

Prepared Statement of Robert E. Ebel, Director, Energy Program, Center 
                for Strategic and International Studies

                     IRAQI OIL: TODAY AND TOMORROW

    Now that the United States can be characterized no longer as a 
liberating force but instead an occupying force, how can the Iraqi oil 
industry be characterized? The following summarizes where matters 
currently stand.
    The southern and northern oil fields are in the good hands of the 
coalition forces. Both major oil fields, north and south, made it 
through the fighting with limited damage. Iraqi forces had set afire 7 
wells in the south, just one in the north, far less than had been 
anticipated. Damage to other oil-related infrastructure, such as 
pipelines, refineries, and storage tanks also appear minimal. In sum, 
the coalition strategy to seize and isolate the oil fields in the very 
stages of the conflict, to protect the infrastructure and prevent the 
Iraqi military from repeating what had happened to the Kuwaiti oil 
fields, proved very successful.
    Unfortunately, destruction from continued looting has not been 
contained. Facilities have been damaged or stolen and oil field 
documentation destroyed. Much of the supporting systems are gone. 
Equipment and machinery has been lost. Importantly, employees are 
finding it difficult to get to their former place of work, either 
gasoline is not available or the means of transportation have been 
stolen.
    Communications remain difficult. In many instances, a return to 
normal will reflect the availability of electricity--not just to run 
the oil pumps and pipelines, but as a way of reassuring the population 
of a return to normal activities.
    Shortly after the intervention, all oil wells were shut in. The 
Southwestern Division of the Army Corps of Engineers took on that 
responsibility, as well as responsibility for closing the oil and gas 
separation plants and pipelines. Wellheads were found to be in 
reasonably good shape, but other infrastructure requires attention. The 
task of the Corps is to return the oil sector to its pre-crisis 
position, ready to produce and to export.
    Limited production has now begun at both the northern and southern 
fields, with the crude to be refined for the domestic market. Petroleum 
products continue in short supply and the distribution system is not 
yet fully operational. LPG--liquefied petroleum gas--is a major source 
of fuel for cooking and heating. LPG in turn is based on natural gas 
produced in association with crude oil, but because only minimal 
volumes of oil are being produced, shortages of LPG appear around the 
country.
    It is very obvious that much rehabilitation must be undertaken to 
reverse the effect on the oil sector of three wars and years of 
sanctions. For example, the Basra representative of the Iraqi Oil 
Ministry has estimated that just 25 percent to 30 percent of the 
Rumaila oil field is in good condition. Any industry, neglected and 
underfunded for more than 20 years, bearing the impact of three wars 
and 12 years of UN sanctions, would suffer greatly, and the oil sector 
is no exception.
    Clearly, those Iraqis who have been working in the oil fields for 
the past years are asking that the United States recognize their 
expertise and authority. After all, they argue, we know the oilfields 
better by far than the Americans and are ready to work. At the same 
time, locals are not apt to offer a particularly warm welcome to those 
Iraqis who have been in exile the past years and who seek to return, 
hopefully to senior positions. Where have you been, while we have been 
suffering, they would ask.

UN ``Oil-for-Food'' Program
    Resolution 986 of the United Nations Security Council, passed in 
1995, authorized the export of Iraqi oil, with the revenues earned to 
be spent to meet the humanitarian needs of the Iraqi people. This 
approach became known as the ``Oil-for-Food'' program.
    According to the CSIS report A Wiser Peace: An Action Strategy for 
a Post-Conflict Iraq, Supplement II: An overview of the Oil-for-Food 
Program, dated February 14, 2003, since the program began in December 
1996 Iraq has exported 3.3 billion barrels of oil valued at $62 
billion. The report notes that over a quarter of the oil revenue pays 
for compensation costs associated with the Gulf War, UN administrative 
costs, and the cost of UN weapons inspectors. Of the funds provided to 
Iraq out of the UN escrow account, only 25 percent have been allocated 
to purchasing food. The remaining 75 percent were allocated across 23 
different sectors and involved at least 13 Iraqi government ministries.
    The report also notes that the Sanctions Committee had approved $42 
billion in humanitarian supply contracts, including $3.6 billion in oil 
industry spare parts. Of these goods, $26 billion had been delivered 
and a further $10.8 billion were in the production and delivery 
pipeline.
    Again referencing the CSIS report, from the beginning of the 
program until mid-2000, Iraq awarded contracts to potentially 
sympathetic permanent members of the UN Security Council, primarily 
France, Russia, and China. In 2000, Iraq began to focus on 
strengthening ties with its neighbors. As public opinion against 
sanctions grew and oil revenue increased, Iraq increasingly favored 
Egypt, the United Arab Emirates and Jordan for supply contracts. 
Because Iraq primarily awards contracts based on politics rather than 
the quality of the goods, the Iraqi people have often received inferior 
goods, including medicines.
    The UN ``Oil for Food'' program was shut down upon military 
intervention by coalition forces but then resumed under the supervision 
of the UN Secretary-General, spending funds already accumulated. Food 
and other aid are being provided by funds earned from earlier oil sales 
but deliveries have been discouragingly slow, largely because of 
bureaucratic entanglements.
    The program is scheduled to end on June 3, but a resolution just 
introduced by the United States, and supported by Great Britain and 
Spain, proposes instead that the program be phased out over a period of 
four months.
    The coalition had spoken of establishing an Interim Iraqi 
Authority, but Iraqi delegates have chosen to term a new governing body 
as a ``transitional government,'' reflecting their desire to move more 
quickly than an interim authority might imply.
    The referenced resolution gives the occupying powers (that is, the 
United States and Britain) the power to sell Iraqi oil, with the income 
to be placed in an administered trust, with appropriate oversight.
    It appears that an advisory committee is to be set up, to be headed 
by Philip Carroll, formerly of Shell Oil. This advisory committee, 
where Iraqis are to hold at least a plurality, will relate to the Iraqi 
Oil Ministry in much the same way as a board of directors functions in 
a corporate structure. The senior person in the Ministry would report 
in turn to the advisory committee.
    But in all this, the United States must take great care in 
conducting itself in a way that does not allow critics of the war to be 
able to say, ``See, I told you so, it really was all about oil.''
Rebuilding the Oil Sector. What Will It Take?
    Until experts have had the opportunity to closely inspect the oil 
refineries, the pipelines, the oil and gas separation plants, storage 
farms, ports of export, the general product distribution network, and 
the oil fields themselves, including a well-by-well approach, only 
guesses can be made as to what it will take, in terms of time and 
money, to restore the Iraqi oil sector to a normal state.
    Saybolt International, a Dutch firm, has visited Iraq on two 
occasions--March 1998 and January 2000--at the request of the United 
Nations, to evaluate the health of the Iraqi oil sector. Their 
findings, in both instances, underscored the sector's lamentable state. 
Observations from the report of the January 2000 visit noted a 
continuing deterioration.
    The group has to report that the previously noted lamentable state 
of the Iraqi oil industry has not improved. It is apparent that the 
decline in the condition of all sectors . . . continues, and is 
accelerating in some cases. This trend will continue, and the ability . 
. . to sustain the current reduced production levels will be seriously 
compromised, until effective action is taken to reverse the situation.
    Past shortages of spare parts, a need to maximize income that led 
to overproduction of the major fields, the absence of modern 
technology, closing then opening oil wells damages the producing 
reservoir, and water encroachment define an oil producing sector whose 
prospects of any early return to a leading role in the world oil market 
are measurably dim. On average it appears that the oil producing 
capacity of Iraq has been declining by 100,000 b/d annually. That 
decline first has to be halted then reversed if growth is to be 
resumed.
    But what defines a ``normal state'' of the Iraqi oil sector? Was 
1979 the last normal year for the industry, just preceding the war with 
Iran, when production hit its all-time peak of 3.5 million b/d? Or was 
it 1990, when crude oil output, having fallen because of the war with 
Iran to barely one million b/d, had by then returned to 3 million b/d, 
only to decline sharply once again following the Iraqi invasion of 
Kuwait?
    The initial effort will be focused on raising oil production to 3.2 
to 3.5 million b/d and that may require 1.5 to 2 years and an 
expenditure of at least $5 billion if not more. Then, attention can be 
directed on plans for further expansion, to a stated 6 million b/d. To 
accomplish that may require $35 to $40 billion, and at least 5 to 6 
years, if not longer, reflecting what detailed assessments of the 
individual segments of the oil industry find.
Who Owns the Oil? Who Can Sell It?
    How soon might exports resume? Based on present field conditions, 
exports might resume within several months, possibly a bit sooner from 
the north, if not further delayed because of the damage inflicted by 
looters.
    But then, other considerations arise. Who owns the oil, who has 
title to it? Who would buy the oil, absent, say, UN approval? No oil 
tanker owner could be expected to load up, absent a title guarantee.
    Can Iraqi oil be sold if the UN sanctions remain in place? Under 
the UN ``Oil for Food'' program, it was the United Nations that gave 
legal title to the oil. UN sanctions prohibit oil exports except under 
this program. But, as noted, the ``Oil for Food'' program comes to an 
end on June 3.
    The referenced U.S. resolution addresses this question by * * *. 
The UN has stated that no Iraqi oil can be exported unless there is a 
new authority in Iraq to serve as the legal agent for the oil, and 
until the UN Security Council recognizes that new authority. Presuming 
a recognized interim authority is established and oil exports resume, 
but then, what happens to the oil revenue? How can its distribution be 
monitored?
    As noted, production of crude oil has been resumed on a limited 
basis, with the crude delivered to refineries to produce fuels needed 
by the local economy. Are the refineries paying for the crude oil they 
receive? If so, at what price, and what happens to that income? Where 
does it go? Most probably the United States believes it controls the 
industry and thus the revenues and will continue to do so until an 
interim authority is in place. Once that happens, the funds could be 
placed in trust with the Iraqi Central Bank, and a designated 
international financial institution could monitor distribution of these 
funds. But, does monitoring also provide an input into how the funds 
are spent?
What About the Geneva Convention?
    A number of interested observers make the interpretation that, 
under the Geneva Convention, the occupying power has the right to sell 
the oil and to use the income for the restoration of order and the 
benefit of the Iraqi people. Not all would agree. Nonetheless, is the 
United States today an occupying power, having shifted from that of a 
liberating power? Apparently so, and that means the Geneva Convention 
can apply.

                                   I

    Suzanne Nossel, a former senior advisor to U.N. Ambassador Richard 
C. Holbrooke, writing in the May-June 2003 issue of Legal Affairs, asks 
the question: can the law of occupation, long disputed and then largely 
disregarded, be useful in Iraq? She then answers by noting that the law 
of occupation could provide cover for more controversial maneuvers. 
Taking over the oil fields, rebuilding them, and even upping production 
could be justified if the proceeds were used to accomplish the United 
States' purported aim, that is, channeling the reserves to meet the 
people's needs. In her judgment, as long as the Administration sticks 
to using the oil to foster reconstruction--and scrupulously avoids 
favoring American oil interests above those of others--taking control 
would be justified and even expected.
    She concludes by stating that if in administering the oil fields 
the United States were found to favor American oil companies over 
existing concessions belonging to France or Russia, for example, the 
American action would be judged an unwarranted departure from the 
status quo, invalid under the Geneva conventions.

                                   II

    An analysis provided by IHL Research Initiative (under the Harvard 
Program on Humanitarian Policy and Conflict Research) underscored that 
the law of occupation is perhaps one of the oldest and today the most 
developed branch of international humanitarian law (IHL). The law of 
occupation applies whenever, during an armed conflict, a territory and 
its population comes under control of the enemy of the State 
authorities previously controlling that territory. In the case of Iraq, 
obligations of the occupying power, among other things, extend to the 
administration of the Iraqi resources for the benefit of its people.

    The analysis concludes with the following:
        ``If Iraqi oil wells were government-owned, the U.S. may 
        administer them and sell the oil. According to some opinions, 
        it may use the proceeds not only for the benefits of the local 
        population, but also, similar to levies, to cover the cost of 
        the occupation (but not of the whole war).''
    Importantly, the analysis underscores that occupation ends whenever 
one of the conditions of occupation is no longer met. That is, when an 
agreement has been signed between the parties at conflict bringing to 
an end the armed conflict. Or, foreign military forces have withdrawn 
from enemy territory or are no longer exerting control over the 
population of that territory.

                                  III

    Prof. Mary Ellen O'Connell, Moritz School of Law, Ohio State 
University, offering her opinion as a guest columnist in the Jurist (a 
publication of the University of Pittsburgh School of Law), writes that 
``occupants are required to manage resources under the law of 
usufruct.HR, art. 55. That law calls for managing resources so as to 
prevent waste. If profits accrued from such management, they may be 
used to pay for the occupying power's costs for local administration. 
An occupying power may not enrich itself from the occupied territory's 
resources. With particular relevance to Iraq, the United States has 
taken the position in the past that an occupant may not award new oil 
development concessions.''

                                   IV

    R. Dobie Langenkamp, professor of law and director of the National 
Energy-Environment Law & Policy Institute at the University of Tulsa, 
in an interview with The Oil and Gas Journal (February 3, 2003), 
offered the following observation.
        ``Under international laws governing warfare going back to the 
        Hague Convention of 1907 and the Geneva Conventions of 1929 and 
        1946, the U.S. and its allies would have the right to produce 
        Iraq's existing oil and gas wells and to use the proceeds to 
        pay the costs of occupation but not the costs of the war 
        itself.''
    Professor Langenkamp added that:

 Prolonged use of troops or foreign contractors to replace 
        Iraqi workers is forbidden by international law;
 The law prohibits unnecessary damage to Iraq's wells, which 
        means they can't be produced so rapidly or carelessly as to 
        damage formations;
 The properties must be returned to the proper government 
        authority in reasonable condition;
 Iraq's current production likely can be increased through 
        workovers and by drilling existing wells deeper or through 
        extensions to new formations. (The U.S. Department of State is 
        on record as claiming that drilling new wells in a military-
        occupied territory is unlawful.)

Contract Status
    Accepting the role of an occupying power raises an associated 
question. What is the status of those oil contracts that have been 
signed with Russia and with China? Will they be honored? Under 
international law, it would seem that these rights should be protected, 
in that contract sanctity is maintained in the event of a change in 
government.
    Russia has been very vocal in its effort to preserve the contract 
it has signed with Iraq to develop the West Qurna oil field. At its 
peak this field should be able to produce 600,000 to 700,000 b/d, a 
prize that will not be given up quietly. China, conversely, has been 
quiet and has not yet taken a position publicly. But the field it would 
develop is comparatively small, with a potential on the order of 60,000 
b/d.
    Several options are available. The interim Iraqi government could 
just review the contract terms, to determine whether these terms were 
acceptable, that they met the interests of the Iraqi people. Now, given 
the course of events in Iraq, the Iraqi authority might not be so 
charitable, and might be prepared to tear up all contracts, based on 
the fact they were concluded with a regime that in no sense represented 
the Iraqi people.
    There most likely will be no contracts let to foreign oil companies 
during the coming transition period. Simply because the investor runs 
the risk that a contract signed during that period might be rejected by 
whatever form of government is put in place at the end of the 
transition period.

What Happens to the Oil Revenues?
    What happens to the revenue when oil exports resume? How to 
safeguard that revenue? Who will determine how these revenues are 
spent? Will the ``Oil for Food'' program, slightly tweaked to reflect 
changing circumstances, still be in play, or might some kind of 
substitute take its place? After all, it is Iraqi oil, owned by the 
Iraqi people. Shouldn't they have the final say in all this?
    Can a means be devised whereby citizens of Iraq will be able to 
share immediately in the oil wealth of the country? A cash dividend 
perhaps, especially helpful to the economy at this time of stress, but 
also giving the population a stake in the future of the oil sector, an 
interest in seeing that it prospers, for, if it does, then they will 
too.
    Most oil exporting nations, despite good intentions, end up 
catching the dreaded ``Dutch disease.'' That is, the economy becomes 
overly dependent on the sale of a single commodity--oil. When oil 
prices are high, the economy flourishes and there is little or no 
effort to diversify away from oil. But at some point oil prices will 
decline and when that occurs, the failure to diversify becomes apparent 
as financial stresses emerge, often followed by civil unrest.

How to avoid such circumstances?
    A variety of approaches are available for consideration. One 
attractive approach would be the creation of a stabilization fund. 
Designated oil-related income would be allocated to a stabilization 
fund when the world oil price exceeded, say, $20 per barrel. If the per 
barrel price declined below $20, then funds would be withdrawn in 
amounts to offset losses to the national budget. Dividends deriving 
from investments made by the fund would then be passed on to individual 
Iraqis, comparable to corporate dividends payable to shareholders.
    The Department of State appears to favor an oil revenue sharing 
arrangement similar to that adopted by Alaska. Stated simply, a portion 
of the state's oil royalty revenue is placed into a permanent fund, and 
dividends from this account are paid out annually.
    Transparency and adequate public oversight are essential for 
whatever arrangement might be chosen. Would a ``new'' Iraqi government 
be comfortable and accepting of the needed transparency and oversight?

Privatization
    There really is no hope of rebuilding Iraq if foreign capital is 
not forthcoming. Thus, a key objective is to secure the large, rapid 
inflow of investment in all sectors. Reality, in turn, requires 
privatization.
    If the indicated production goal of 6 million b/d is to be attained 
as quickly as possible, the requirement for new investment--estimated 
to fall between $35 to $40 billion--will far exceed the capabilities of 
the oil sector itself. Where might the investment be found? In the 
pocketbooks of foreign oil companies. But that means privatization, and 
a move to privatize might run counter to the nationalistic feelings of 
the Iraqi people. Thus, if privatization is deemed necessary for the 
future of the oil sector, then the matter will have to be handled very 
carefully.

Looking Ahead
    There are two objectives regarding the future of Iraqi oil. First, 
to return production to a level between 3.2 to 3.5 million b/d. To do 
so may require 1.5 to 2 years and an expenditure of between $5 to $7 
billion, depending in part on what an assessment of the operating 
fields at Rumaila and Kirkuk finds. It is generally thought that these 
fields may not be in the best of shape, with little investment over the 
years and facing a continuing lack of spare parts, plus probably having 
been over-produced, with water encroachment now limiting recovery 
levels.
    There is a particular concern regarding the Kirkuk field, where the 
quality of the crude oil has been somewhat degraded, as surplus fuel 
oil has been re-injected into the producing horizons.
    If production can be raised to 3.5 million b/d, that would match 
the level of the last normal year for the industry, reached in 1979. 
Since then, three wars and some 12 years of sanctions have gotten in 
the way.
    Then, to embark on an effort to expand production to not less than 
6 million b/d. Proven reserves clearly would more than support this 
higher level. But, will the market? At the moment, production sharing 
agreements seem to be the acceptable approach to securing foreign 
investment. But, given the attraction of Iraqi oil--good quality, low 
production costs, easy access to ports of export--and with this 
attraction known to both sides, the terms offered by Iraq likely will 
be pretty tough.
    Circumstances would seem to dictate that Iraqi oil production might 
reach 4 to 4.5 million b/d by the end of this decade, clearly not the 
flood that some have speculated.

OPEC: Stay or Leave?
    Iraq was a founding member of OPEC. Indeed, the organizational 
meeting was held in Baghdad. The question now asked is: Does Iraq keep 
its membership in OPEC, or does it leave?
    For the interim, Iraq will keep its membership, as nothing would be 
gained by leaving. But it is quite possible that in the future, when 
continued membership might be perceived as constraining plans for 
growth in production and exports, then departure might be addressed. 
When might that come about? Perhaps not this decade, but national 
interests will be the ultimate decision-maker.

How Far Will $20 Billion Go?
    When Iraq returns to its prewar level of production and exports, 
and assuming a price per barrel of $25, how much might the country earn 
from these exports? About $20 billion. Of that, a portion, possibly 20 
percent, will have to be returned to the oil sector to cover costs of 
production, pipeline transport to a port of export, and storage at the 
port, leaving, say, $15 billion. That sum falls far short of covering 
rebuilding not just the oil sector, but the entire infrastructure of 
the country--roads, hospitals, schools, housing, and the like.
    Moreover, how to address the debt that Iraq has accumulated, a debt 
exceeding some $320 billion ($199 billion in Gulf War compensation 
claims and a foreign debt of $127 billion)? Clearly, to the ``new'' 
Iraqis, taking on these obligations will be regarded as unacceptable, 
and requests for cancellation and rescheduling likely will come forward 
early on.

    Mr. Barton. Thank you, sir.
    We now would like to hear from Mr. Barnes.

                  STATEMENT OF JAMES J. BARNES

    Mr. Barnes. My name is Joe Barnes. I'm a research fellow at 
the Baker Institute for Public Policy at Rice University in 
Houston.
    Mr. Chairman and members of the subcommittee, ladies and 
gentlemen, thank you very much for inviting me here today. I, 
too, have a somewhat lengthier statement, but I will just make 
a few points, if I might.
    I will not specifically address the elements of the U.S. 
draft resolution currently before the United Nations Security 
Council, but my comments I think will make clear that I support 
many of the drafts resolution's main features related to the 
Oil for Food Program.
    I would like to make the following points. Whatever 
decisions are taken on the Oil for Food Program and the 
resumption of Iraqi oil exports, the goal must be the prompt 
and adequate supply of humanitarian and reconstruction aid to 
the Iraqi people. Their interest must be paramount to their 
current and future well-being that is at stake. Any proposal on 
handling Iraq's oil exports must be judged by this light.
    Second, the Oil for Food Program was created for the 
purpose of providing vital humanitarian and other supplies to 
the Iraqi people while restraining the regime of Saddam Hussein 
from acquiring funds to purchase weapons of mass destruction or 
other traditional military equipment. With the fall of Saddam's 
regime, the fundamental purpose of the program no longer 
exists. It should be phased out.
    Iraq faces daunting security and structural challenges in 
its efforts to resume uninterrupted oil exports. It seems 
possible that an interim Iraqi government or authority could be 
in place before or soon after oil starts to flow in significant 
amounts. The United States should make it a priority to help 
set up an interim government that would be able to handle the 
resumption of oil sales, while encouraging an international 
effort to provide relief until oil starts to flow in 
significant amounts.
    Financial oversight of oil revenue is best handled by 
multinational agencies such as the IMF and the World Bank. The 
Fund will presumably be involved with Iraq in such critical 
matters as rescheduling debt in any case. The Bank will no 
doubt be called upon to play an important part of Iraqi 
reconstruction.
    I note that the administration supports an oversight 
function for the Fund and the Bank, as well as the United 
Nations, in its proposal to create an Iraqi assistance fund to 
serve as a repository for the country's oil revenues.
    Significant funds remain in the escrow accounts under the 
current U.N. Oil for Food Program. These funds need to be 
disbursed to pay for emergency aid to Iraq. It might be passed 
to permit the U.N. to continue managing these funds on an 
expedited basis until the balance is liquidated. I note again 
that the U.S. proposal at the U.N. suggests something along 
these lines.
    The Iraqi oil sector possesses a large number of highly 
competent professionals and technicians, very few of whom are 
tainted by direct association with human rights abuses under 
Saddam's regime. These individuals can be relied upon to 
conduct the sales and marketing of oil by the country and to 
manage the operations, maintenance, repair and reconstruction 
of Iraq's petroleum sector.
    Comprehensive involvement of Iraq's oil technocracy is 
extremely important for pragmatic and political reasons. Many 
senior members of Iraq's oil elite are nationalistic in their 
attitudes. They, like many other observers in Iraq and around 
the world, will be extremely sensitive to any suggestion that 
the United States or our coalition partners view Iraq's oil 
resources as ``spoils of war.''
    Last, the coalition has a vital short- to medium-term role 
to play in providing security to Iraqi professionals and 
technicians working in the oil sector, as well as protecting 
the actual fields and key infrastructure. The lack of security 
for these workers and their families apparently represents a 
major impediment to resuming normal operations in the Iraqi oil 
sector today.
    Thank you.
    [The prepared statement of James J. Barnes follows:]

Prepared Statement of James J. Barnes, Research Fellow, James A. Baker 
            III Institute for Public Policy, Rice University

    Mr. Chairman, members of the subcommittee, ladies and gentlemen: 
Let me begin by commending the subcommittee for holding hearings on the 
UN's Oil for Food Program. It is a subject that is both important and--
particularly given the Administration's efforts to seek another UN 
Security Council resolution dealing in large part with the program--
timely.
    Out the outset let me stress that my views do not necessarily 
reflect those of the Baker Institute for Public Policy; they are 
entirely my own. I would, however, like to thank my colleague at the 
institute, Amy Myers Jaffe, for her extensive and invaluable assistance 
in preparing this testimony.
    In my remarks today, I will outline the rationale for the creation 
of the Oil for Food Program under UN auspices, explain how the program 
functioned, discuss the impact the program had on the stability of 
international oil markets, and conclude with some closing observations 
on the proper course for handling the future sales of Iraqi oil. I will 
not specifically address the elements of the US draft resolution 
currently being discussed at the UN Security Council. But my comments 
will make clear that I support many of the draft resolution's main 
features related to the Oil for Food Program.
    Before I turn to these details, I would like to first emphasize 
several critical points that will, I hope, be useful at the 
subcommittee considers this important issue.

Key Points
    1) Whatever decisions are taken on the Oil for Food Program and the 
resumption of Iraqi oil exports, the goal must be the prompt and 
adequate supply of humanitarian and reconstruction aid to the Iraqi 
people. Their interests must be paramount; it is the current and future 
well-being of Iraqis, after all, which is at stake. Any proposal on 
handling Iraq's oil exports must be judged in this light.
    2) The Oil for Food Program was created for the purpose of stopping 
the regime of Saddam Hussein from acquiring funds to purchase weapons 
of mass destruction and further expand its traditional military might. 
With the fall of Saddam's regime, the purpose to this program no longer 
exists. It should be phased out.
    3) Iraq faces daunting security and structural challenges in its 
efforts to resume uninterrupted oil exports. It seems possible that an 
interim Iraqi government or authority could be in place before oil 
starts to flow in significant amounts. The United States should make it 
a priority to help set up an interim government that would be able to 
handle a resumption of oil sales, while encouraging an international 
effort to provide relief until oil begins to flow.
    4) Oversight of oil revenue is best handled by multinational 
agencies such as the International Monetary Fund and World Bank. The 
Fund will presumably be involved in such critical matters as 
rescheduling Iraqi debt in any case; the Bank will no doubt be called 
upon to play an important role in Iraqi reconstruction. I note that the 
Administration supports an oversight function for the Fund and the Bank 
(as well as the UN) in its proposal to create an ``Iraqi Assistance 
Fund'' to serve as a repository for the country's oil revenues.
    5) Significant funds remain in the escrow accounts under the 
current UN Oil for Food Program. These funds need to be disbursed to 
pay for emergency aid to Iraq. It might be best to permit the UN to 
continue managing these funds, on an expedited and transparent basis, 
until the balance is liquidated. I note again that the US proposal at 
the UN suggests something along these lines.
    6) The Iraqi oil sector possesses a large number of highly 
competent professionals and technicians, almost all untainted by 
association with human rights abuses under Saddam's regime. These 
individuals can be relied upon to conduct the sales and marketing of 
oil by the country and to manage the operations, maintenance, repair 
and reconstruction of Iraq's petroleum sector. Comprehensive 
involvement of Iraq's oil technocracy is extremely important for 
practical and political reasons. Many senior members of Iraq's oil 
elite are nationalistic in their attitudes. They--like many other 
observers in Iraq and around the world--will be extremely sensitive to 
any suggestion that the United States or our coalition partners view 
Iraq's oil resources as ``the spoils of war.''
    7) The coalition has a vital short- to medium-term role to play in 
providing security to Iraqi professionals and technicians working in 
the oil sector, as well as protecting the actual fields and key 
infrastructure. The lack of security for these workers and their 
families represents a major impediment to resuming normal operations in 
the Iraqi oil sector today.

Background
    UN Resolution No. 986, which was adopted by the Security Council in 
April 1995 and finally implemented in December 1996, enabled Baghdad to 
sell specified dollar amounts of crude oil over six-month periods, in 
part for the purchase of humanitarian supplies for distribution in Iraq 
under UN supervision. In December 1999, the Security Council voted to 
remove limits on the amount of oil Iraq could export as Baghdad's 
production capacity was enabling it to reach the previously established 
sales ceiling of $5.2 billion per six-month period. Roughly 72% of the 
total revenues from the Oil for Food program have been allocated toward 
humanitarian needs. The remaining proceeds help pay compensation for 
Gulf War victims (25% since December 2000), pipeline transit fees to 
Turkey, spare parts and maintenance for the oil sector, funding for 
UNMOVIC and administrative and operational costs for the United 
Nations.
    UN supervision included monitoring of Iraq's crude oil supply 
contracts to ensure at-the-market pricing (to discourage side, kickback 
payments); monitoring export shipping volumes at Iraq's main port of 
Mina Al-Bakr and at the Turkish pipeline outlet at Ceyhan (to 
discourage smuggling); management of the escrow account for oil revenue 
receipts and humanitarian aid disbursements; and oversight of 
contracting for the importation of goods to ensure that no banned 
materials reached Iraq.
    Oil sales activities under Oil for Food were handled directly by 
members of the Iraqi government State Oil Marketing Organization (SOMO) 
and had no UN involvement. Rights to sell the oil were retained by the 
sovereign Iraqi state and not transferred to the United Nations. The 
rights to exported oil were transferred directly from SOMO to the 
purchaser. Iraqi government officials also selected the goods and 
vendors for the importation of humanitarian assistance. The UN's role 
was limited to monitoring these activities to ensure that no 
transactions occurred that would allow Iraq to continue to fund and 
develop its weapons program.
    Since the Oil for Food Program first went into effect on December 
10, 1996, Baghdad has exported around 3.4 billion barrels of oil under 
UN supervision worth about $64 billion dollars. About $44 billion worth 
of humanitarian supply contracts including $3.8 billion worth of oil 
spare parts and equipment, have been approved by the 661 Sanctions 
Committee and ``fast-tracked'' by the UN Office of the Iraq Programme. 
In mid-2002, around $22.6 billion worth of humanitarian supplies and 
equipment had actually been delivered to Iraq, including $1.4 billion 
worth of oil industry equipment, while another $10.5 billion worth of 
humanitarian supplies, including $1.7 billion worth of oil industry 
equipment, were in the production and delivery process. The UN says 
that about $10.1 billion worth of supplies are currently in the 
pipeline.
    Broadly speaking, the program was successful in depriving the 
Hussein regime of large revenues to use to fund weapons and military 
programs. However, government and industry estimates suggest that Iraq 
earned over $8 billion in revenues since 1997 through illegal smuggling 
and hidden surcharges.
    It is ludicrous, given the US and coalition presence in Iraq, to 
suggest that Iraqi oil revenues will now be used to acquire weapons of 
mass destruction. In addition, there is no precedent for the United 
Nations to monitor national oil sales to prevent ``corruption.'' It is 
my opinion that issues of transparency and accountability in handling 
Iraq's oil revenues would best be handled by multinational institutions 
normally charged with financial matters and economic development--
notably the International Monetary Fund and the World Bank.
    Over the course of its existence, the politics of the Oil for Food 
program has served as a key driver of oil price volatility. Concerns 
about the reliability of Iraq's UN-monitored oil exports were a major 
factor causing swings in the market in recent years. Periods of program 
evaluation and renewal debate prompted severe disturbances in 
international oil prices as oil traders worried that unsettled UN 
politics might result in a sudden--albeit temporary--cut-off of Iraqi 
oil exports. Saddam Hussein also demonstrated a willingness to use the 
``oil weapon,'' sporadically refusing to continue to participate in Oil 
for Food for weeks or months in order to manipulate oil markets and 
display his personal power. It is important that Iraq's new oil regime 
be designed to create a transparent, predictable environment where 
changes in the flow of exports do not disrupt markets and where a UN 
process cannot influence the stability of those flows.
    Ironically, Saddam Hussein's political use of Iraq's petroleum 
sector did not result in the kind of damage to oil field capacity that 
might have been expected. This was due in large part to the capability 
and dedication of Iraq's oil professionals, who managed remarkably well 
in an atmosphere marked by Saddam's Hussein's volatile interventions, 
an almost complete lack of foreign investment, and a crippling shortage 
of spare parts and maintenance equipment. This bodes well for the 
future prospects of the Iraqi industry. Failure to utilize Iraq's oil 
professionals in managing the production and marketing of the country's 
petroleum could result in a serious backlash in Iraq and a public 
relations problem around the world. Given suspicions (pervasive, if 
unfounded) that the United States invaded Iraq to control its oil, our 
actions in regard to the Iraqi oil sector must be above reproach.

    Mr. Barton. Thank you.
    The Chair is going to recognize Mr. Boucher first, because 
he has another appointment, very quickly, 5 minutes for 
questions.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    I want to thank the witnesses for taking their time this 
morning to inform us on this timely matter. My questions are 
going to be very brief.
    Mr. Ebel, in the course of your testimony, you alluded to 
the potential necessity for the United Nations to pass some 
kind of resolution that empowers the United States, the United 
Kingdom, as occupying powers to dispose of oil, to produce oil 
and to sell it on world markets. I guess the theory of that is 
that any company that might want to buy the oil would be 
reluctant to do so if it's not sure who has title, and a U.N. 
resolution under international law could confer that title.
    Mr. Ebel. That's correct.
    Mr. Boucher. Does that appropriately state the 
circumstance, and if so----
    Mr. Ebel. Yes, it does.
    Mr. Boucher. And if so, my question to you is, how 
essential, therefore, is some action by the United Nations to 
the ability of the United States to produce and sell oil from 
Iraq?
    Mr. Ebel. Oil could be exported from Iraq tomorrow. The 
storage tanks at the port of Ceyhan on the Mediterranean are 
full. Unfortunately, no buyer is going to take on that oil 
until he can assure himself and his corporate lawyers back home 
that he will have an uncontested legal title to the oil that he 
would purchase.
    There is no entity today to give legal title to the oil. 
The United Nations did it under the Oil for Food Program, and 
under the resolution, the way I read the resolution, the way I 
read the powers of the Geneva Convention, the occupying powers, 
which in this instance would be the United States and Great 
Britain, could then transfer legal title to a potential buyer. 
But until that resolution is passed, there is not going to be 
any oil exported from the United States, in my judgment, 
because----
    Mr. Barton. From Iraq, you mean?
    Mr. Ebel. I'm sorry, from Iraq, because----
    Mr. Barton. We're not exporting for the United States, 
either.
    Mr. Ebel. No, we're not. I'm sorry. Because there is no 
potential buyer, and no tanker owner would weigh in.
    Mr. Boucher. So simply ending the Oil for Food Program, or 
phasing it out over a 4-month period, by itself is not 
sufficient?
    Mr. Ebel. No.
    Mr. Boucher. We require other action by the United Nations.
    Mr. Ebel. Exactly.
    Mr. Boucher. Now, who is proposing that that additional 
necessary action be taken? Does the United States have a 
resolution pending to that effect?
    Mr. Ebel. It's contained in the resolution. It is contained 
in the resolution, and there are several----
    Mr. Boucher. It's contained in the resolution that phases 
out Oil for Food over 4 months?
    Mr. Ebel. Right. And there are several specific paragraphs 
in there, ensuring the potential purchaser that he won't be hit 
by any future legal claim.
    Mr. Boucher. Mr. Barnes, do you want to comment on that?
    Mr. Barnes. I was just going to say he's quite right. I 
guess the draft resolution is rather comprehensive, covers a 
number of subjects, including the Oil for Food Program, the 
phasing out, but also very specifically the whole question of 
title.
    Mr. Boucher. So we do need U.N. action on this measure.
    You are observers of what's happening at the U.N. How 
likely are we to get approval of this resolution?
    Mr. Ebel. Unfortunately, I'm not privy to whatever back 
room dealings are going on these days, but I would hope that 
something could be worked out wherein Russia and France would 
have some reason to believe that their commercial interests 
were going to be protected.
    Mr. Boucher. That's the key to getting it passed, in your 
opinion?
    Mr. Ebel. That's my judgment.
    Mr. Boucher. I only have one other question, Mr. Chairman. 
Thank you, by the way, Mr. Ebel and Mr. Barnes for that answer.
    Mr. Caruso, you mentioned that prewar Iraq was producing 
2.5 million barrels of oil per day, and you believe--or your 
projection is that Iraq can come back to that capacity by the 
end of this year.
    Was that an export level for oil that was capacity related, 
or was that the limit that was allowed under the Oil for Food 
Program?
    Mr. Caruso. The 2.5 million barrels a day projection by the 
end of the year was that of Thamir Ghadhban, who is now the new 
interim head of the Oil Ministry. That is his----
    Mr. Boucher. I'm not contesting the projection. I'm just 
asking whether----
    Mr. Caruso. No, I will just clarify that it wasn't an EIA 
projection.
    The second part is that the productive capacity of Iraq, 
based on our best estimate, prior to the war was about 2.8 
million barrels a day. They were producing 2.4, 2.5. It was 
varying month to month, based on the sales process and various 
shenanigans that the Iraqi government was occasionally 
intervening. So it was not limited by their capacity, nor the 
Oil for Food Program, because the Oil for Food Program had 
expanded to the point where Iraq could have sold as much oil as 
they could produce. It was more of what the market would bear, 
given the contractual terms. As Chairman Tauzin pointed out, 
some of those contracts were not so appealing, because 
oftentimes you didn't know what the price would be until you 
actually lifted the oil. So that was the prevailing problem 
with that.
    Mr. Boucher. Thank you.
    The other question I have is, any projection that you or 
the other gentleman to whom you referred may be making about 
the capacity that Iraq will have for oil exports by the end of 
next year, perhaps by the end of 3 or 4 years, do you have any 
longer term projections on capacity?
    Mr. Caruso. Iraq, before the invasion of Kuwait, Iraq had 
been producing 3.5 million barrels a day, so there isn't any 
question that the resource base is there and the infrastructure 
at one time had been there. But, of course, it has deteriorated 
after 12 years of lack of investment.
    So I think in the medium term--let's say that's a year or 
so--3 million barrels a day seems to be a reasonable target. 
Again, the interim head of the Iraqi ministry has said that as 
well. Over the much longer term, Iraqis at one time had a plan 
to go to 6 million barrels a day. That, of course, is going to 
take considerable investment and time, probably in the--
certainly, even among the optimists, 3 to 5 years.
    Mr. Boucher. Okay. That's fine.
    Mr. Ebel, do you want to comment, briefly? My time has 
expired.
    Mr. Ebel. I've had the privilege of working with the Iraqi 
opposition since before Christmas, at the request of the 
Department of State, in helping them better understand what 
lies ahead in terms of the future of Iraqi oil the morning 
after.
    I would guess that to go from where they are today, in 
terms of producing capacity, to get them back to normal--and 
``normal'' would be 3.5 million barrels a day--it might take 
1\1/2\, 2 years, and it might take $5-6 billion. And then where 
do we go from there? We go to the 6 million barrels a day that 
the Iraqis want to reach as quickly as possible because they 
need the revenue.
    What would that take in terms of time and in terms of 
money? In their judgment, it would take at least 5 to 6 years, 
and perhaps as much as $40 billion.
    Mr. Boucher. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    The chair recognizes himself for 5 minutes. We're almost 
certainly going to have more than one round of questioning.
    My first question--and I'm going to direct these to Mr. 
Ebel and Mr. Barnes, but if Mr. Caruso knows the answer, feel 
free to pitch in--who at the U.N. actually has administered the 
so-called Oil for Food Program? Is there an administrator and, 
if so, who is that individual?
    Mr. Ebel. There is, but I'm sorry, Mr. Chairman, I do not 
know his name.
    Mr. Barnes. Isn't it the Office of the Iraq Program?
    Mr. Ebel. Yes.
    Mr. Barnes. I think it's called that, and I also don't know 
the name of the administrator.
    Mr. Barton. Okay. Do you know if the same individual has 
been the administrator the entire time of the program?
    Mr. Ebel. That I do not know.
    Mr. Barton. When our staff has contacted the United 
Nations, we've been told that they've been audited over 100 
times, but we can't get any of the audit documents. Do either 
of you gentlemen know if they've ever really had an real audit 
of this program?
    Mr. Ebel. I can only comment in this fashion, that the data 
that were provided in the CSIS report that I referenced in my 
testimony was found by accident. By accident, the U.N. posted 
on their website certain statistics that had not been made 
available previously. Of course, when they found out about it, 
they took it off. But fortunately, our people had seen it and 
took it off the website.
    But as I mentioned, they don't publish the kinds of data 
that we need.
    Mr. Barton. Do either of you know if the United States, 
through EIA or the State Department, or the Department of 
Commerce, has ever formally requested a true audit of the 
program?
    Mr. Barnes. I know they've been worried about it, but 
whether or not they've ever made a formal request, I do not 
know.
    Mr. Barton. Do you know, Mr. Caruso?
    Mr. Caruso. Certainly EIA has not. I know that based on the 
U.N. information here that available from the Office of Iraqi 
program, that they have provided an assessment report. 
According to this, the most recent one was toward the end of 
2002, November 12, 2002.
    Mr. Barton. As far as you gentlemen know--and obviously, we 
don't expect you three individuals to be the universe of 
knowledge on the program--but there has never truly been an 
audit that's been publicly reported; is that a fair statement?
    Mr. Barnes. Fair enough.
    Mr. Ebel. Yes.
    Mr. Barton. Is there, under U.N. regulations, or any other 
international body, a mechanism that exists to get a real 
audit? In other words, this subcommittee wants to know how the 
program has been run and where the money has gone and what's 
been purchased, and we get snippets from various investigative 
reports. But is there a formal mechanism to actually get a true 
audit of the program?
    Mr. Ebel. I'm not aware that there is, Mr. Chairman.
    Mr. Barton. Okay.
    Mr. Barnes. Although I doubt--whether or not there is a 
formal mechanism, clearly a major funder of the United Nations, 
like the United States can certainly make, and I assume has 
made, informal representations of that effect.
    Mr. Barton. Well, we're certainly going to.
    Mr. Barnes. That's what I suspect.
    Mr. Barton. I can guarantee that, that we're going to.
    Let me ask another question. One of my oil and gas 
producers in Texas has told me, anecdotally, that right before 
the latest war Iraq was selling oil to Syria for $9 a barrel 
when the world price was over $30 a barrel. How could that be 
if the U.N. is administering all the oil sales and at least 
supposedly nothing is sold without U.N. permission? How in the 
world could Iraq be selling oil to another country for $9 a 
barrel, which was about $25 a barrel under the world price?
    Mr. Ebel. It is my understanding, Mr. Chairman, it worked 
this way: there was a pipeline carrying oil from Iraq to Syria, 
handling about 200,000 barrels of oil a day, sold at a price 
well below the world market price. Some of that money, the 
difference between what the sale price was and what the oil 
could be sold for on the world oil market, was returned to Mr. 
Saddam Hussein.
    Mr. Barton. Is the number that I just stated within the 
boundaries of what you believe to have happened?
    Mr. Ebel. I have only seen anecdotal evidence also, so I 
don't----
    Mr. Barton. Well, you're not under oath, so if you want to 
put in anecdotal evidence in----
    Mr. Barnes. Anecdotal evidence, that's a fancy word for 
hearing stories. I have heard stories at $8 and $9.
    Mr. Barton. Okay. So I'm in the ballpark.
    Mr. Barnes. Yes.
    Mr. Barton. If you wanted to speculate, would that be one 
reason Saddam Hussein and his thugs might have found sanctuary 
in Syria immediately after the war?
    Mr. Ebel. That conclusion is an easy one to draw, Mr. 
Chairman.
    Mr. Barton. Mr. Caruso, do you have a comment on that?
    Mr. Caruso. I just wanted to add that the oil sold through 
Syria was outside of the--was not under any sanctions.
    Mr. Barton. Well, that's the whole point. If the U.N. is 
the paragon of efficiency and enforcement, there shouldn't be 
anything like that happening. That was the whole point in going 
through the illustrious United Nations, that they can manage 
this program effectively.
    Mr. Barnes. And it was not just Syria. I gather there was a 
lot of smuggling going on. There was smuggling through small 
lighters into Iran, there was smuggling into Jordan, our ally, 
and smuggling into Turkey.
    By the way, I do think our allies in the north, the Kurds, 
also made a sizable sum of money off marketing smuggled Iraqi 
oil.
    Mr. Barton. My time for the first round has expired.
    Mr. Barnes. So it was going out all the way, all around.
    Mr. Barton. The gentleman from Texas, Mr. Hall, is 
recognized for 5 minutes.
    Mr. Hall. Thank you, Mr. Chairman.
    I notice in Mr. Barnes testimony, he said oil sales 
activities under Oil for Food were handled directly by members 
of the Iraqi government State Oil Marketing Organization----
    Mr. Barnes. Right.
    Mr. Hall. SOMO, I think is the word you used for it--and 
had no U.N. involvement.
    Mr. Barnes. Except the verification of prices, if they were 
in the ballpark. Is that correct, Mr. Caruso?
    Mr. Caruso. Right.
    Mr. Hall. You made the statement, and it's a correct 
statement, is it not?
    Mr. Barnes. Yes.
    Mr. Hall. Mr. Ebel, you stated on page 3 of your statement 
that the U.N. Oil for Food Program was shut down upon military 
intervention by coalition forces, but then resumed under the 
supervision of the U.N. Secretary General.
    Mr. Ebel. That's correct.
    Mr. Hall. It may be correct, but do you agree with that? 
They had no part in it before and gave no support to us, and 16 
times out of 16 they turned their back on the United States of 
America.
    Why should we turn it over to them now?
    Mr. Ebel. The way that worked, Mr. Hall, was that they were 
spending money that it accumulated from previous oil sales.
    Mr. Hall. Yes. Well, they weren't there when it was 
accumulating and they weren't handling it. Why would they 
handle it now? Why turn to them now? Why on earth would we turn 
to Turkey or France or Germany for any reconstruction program?
    Mr. Ebel. It's still being handled by the United Nations.
    Mr. Hall. Let me ask you, Mr. Ebel, what are the 
opportunities in this transition in exercising some control 
over the delivery of food or medicines to be sure from this 
point forward, at least, that it gets to the target that we 
intend it for?
    Mr. Ebel. I think the difficulty will be that the 
distribution inside Iraq of the humanitarian goods and services 
are being handled by local Iraqis, and those local Iraqis have 
dispersed, so that the distribution these days is in shambles.
    Mr. Barnes. I might note that there was always a 
distinction made in the distribution between--there was 
actually stuff distributed in the Kurdish portions of the 
north. That will probably be less disruptive. But in the 
balance of the country, you're quite right. We should 
anticipate disruption.
    Mr. Hall. Mr. Caruso, do you have anything to add to that?
    Mr. Caruso. No, Mr. Hall.
    Mr. Hall. Let me just understand where the three of you 
are. You all seem concerned about what the other Arab nations 
think about any actions that the United States might take as a 
conquering nation, fearful that they might think that we would 
want their oil for our consumption, knowledgeable that we get 
55 or 60 percent of our energy from that area.
    Are you all three just totally opposed to the United States 
recovering some of that gigantic cost that we expended, alone, 
with no help from the United Nations, with no help from Turkey, 
with no help from Germany, with no help from France, little 
help, if any, from Russia or China, to recover for hard-pressed 
American taxpayers, at this time when we have a deficit that's 
unbelievable, of some of our outlay for having to go alone in 
the conquering of as rogue nation? Is it just unthinkable that 
we would expect some retribution from a conquered nation?
    How about you three as taxpayers? You three men are 
probably all big taxpayers--I hope you are. You should be. But 
is that just repugnant to you?
    Mr. Barnes. I would note first of all that it is not in 
general concurrence with what we did in the past. After World 
War II, we did not lift the industrial capacity of Germany or 
Japan and ship it to the States. They were net recipients, huge 
net recipients of U.S. largess, these two countries that made 
world war, after World War II. So it would be a break with U.S. 
tradition to exact from Iraq significant expenditures.
    I also believe there may be a legal question under the 
Geneva Convention that Mr. Ebel mentioned, which is that, 
although under the Geneva Convention--are we a signatory to 
this part of the Geneva Convention?
    Mr. Ebel. We are under the Geneva Convention. We can use 
the income to pay for the cost of occupation, but not the cost 
of the war.
    Mr. Barnes. Also, frankly, I find it really difficult to 
imagine making cash transfers from a war-ravaged county, with a 
per capita GDP of $1,500, to a country like the United States 
with a GDP of $11 trillion and a per capita GDP of $27,000 a 
year. That's an incredible transfer of income.
    Mr. Hall. Do you find any problems with the drug companies 
in this country selling to Mexico and China prescription drugs 
at a fourth of what they sell to our people here? They base it 
on the same assumption that you use.
    Mr. Barnes. It's called--If it means that people in Mexico 
are getting drugs, yes, I agree. I agree with that.
    Mr. Hall. I think I probably asked you an unfair question. 
I'll withdraw it.
    Mr. Chairman, I think I will reread their testimony, and I 
thank the gentlemen for giving us their time.
    I yield back my time.
    Mr. Shimkus. [Presiding.] Thank you, Mr. Hall.
    The chair now recognizes the gentleman from Oregon, Mr. 
Walden, for 5 minutes--for 8 minutes. I'm sorry.
    Mr. Walden. Thank you very much, Mr. Chairman.
    Mr. Shimkus. Five plus three.
    Mr. Walden. That's eight, which is probably better auditing 
and accounting than we're seeing in this program.
    I want to go back to the issue of the audits. What would 
you recommend we do here to be able to actually figure out how 
this program has been audited, if it's been audited? How do we 
justify what's happened there in the UN?
    Mr. Ebel. The only way, Mr. Walden, that we can find out is 
through a very thorough audit, and how can you force an audit 
on the United Nations. It would seem to me an intervention by 
the President of the United States, with a request made to the 
Secretary General, I think that would put him in a position of 
having to respond.
    After all, the American taxpayer issue has already been 
raised, and we should have a right to know how our money is 
being spent at the U.N.
    Mr. Barnes. I would note, by the way, that negotiations are 
ongoing about this U.N. resolution right now. I assume there's 
going to be some ``horse trading'' going on, and presumably 
some request or some mandate for an audit could be part of the 
final resolution. Frankly, it's ongoing in New York right now.
    Mr. Walden. Are you aware of any countries that object to 
an audit?
    Mr. Barnes. I don't think people would object to an audit 
in public.
    Mr. Walden. Another reason why the United Nations needs to 
live under some open meetings requirements.
    Mr. Barnes. On the other hand, I am from Houston, which is 
the city of Enron, so we're a little bit touchy down there 
about transparency questions.
    Mr. Walden. We are here in this committee as well.
    The other issue I have is just in terms of making sure we 
have not only an adequate supply of oil and access to it, but a 
stable supply. These attacks 2 days ago, whenever it was, in 
Saudi Arabia by the Al Qaeda seemed to be extra-ordinarily well 
organized and executed.
    My question is, what would have happened to oil supplies 
and oil prices had they picked refineries rather than housing 
compounds?
    Mr. Ebel. The prices went up just because of the attack on 
the housing. The perception that this is a step toward perhaps 
an attack, just as you described, and the prices would 
probably--if the next attack is directed to a refinery, you 
would get a price jump of $3, $4, or $5 a barrel, and not that 
other producing nations might not be able to make up for that 
loss. But it's the traders operating in New York who anticipate 
we're going to have a shortfall in supply and then anticipating 
what the prices are going to be.
    That was part of our worst case scenario that we developed 
at CSIS last November, where under a worst case scenario, where 
in addition to the loss of Iraqi oil you had an attack on 
Israel, the use of weapons of mass destruction, and terrorist 
activities inside of Saudi Arabia and Kuwait, taking more oil 
off the market, we saw oil prices spiking at $80 a barrel.
    Mr. Walden. Eighty dollars?
    Mr. Ebel. Eighty dollars a barrel.
    Mr. Walden. If you took Saudi Arabia and Kuwaiti oil off 
the market----
    Mr. Ebel. Right, and you didn't have to take it all off, 
just part of it.
    Mr. Walden. Just disrupt it.
    Mr. Ebel. Yes.
    Mr. Walden. What part, what percent?
    Mr. Ebel. It's difficult to say.
    Mr. Walden. So the actual percentage wasn't the issue, as 
much as----
    Mr. Ebel. As the perception, the psychological impact on 
the marketplace, yes.
    Mr. Walden. If I recall, one of you indicated that the 
Iraqi oil production levels I guess the pre-Gulf War of 1991, 
was somewhere in the area of 2-3 million barrels a day?
    Mr. Ebel. Well, the last normal year, in my judgment, for 
Iraqi oil was 1979, the year before the war with Iran. That was 
3.5 million barrels of oil a day. Then it declined during that 
war, and once that war was over, it started to go back up 
again. Then they went after Kuwait. They had gotten up to about 
2.8, and along came the invasion of Kuwait and it dropped down 
to half-a-million barrels a day, until the sanctions came into 
play.
    So, in my judgment, the last normal year for the Iraqi oil 
industry was 1979.
    Mr. Barnes. And I think that Bob makes a good point, which 
I think a lot of people forget, which is that the current 
disrepair of the Iraqi oil industry dates back 20 years.
    Mr. Walden. That was going to be my next question.
    Mr. Barnes. Twenty years of chronic, looting and damage 
aside, 20 years of chronic underinvestment and mismanagement.
    Mr. Ebel. We have had----
    Mr. Walden. And that's at the refinery level as well as 
pipelines. It's across the whole spectrum?
    Mr. Ebel. On two occasions we have had a Dutch firm go into 
Iraq and make an inspection of the Iraqi oil industry. Saybolt 
International is the name of the firm. They went in in 1998 and 
again in 2000, and both times their report stressed the status 
of the Iraqi oil industry as ``lamentable.'' That was well over 
3 years ago.
    Mr. Walden. Can you give an estimate of what the cost would 
be to bring it up to modern standards, and the time-line?
    Mr. Ebel. If we were to get it back to that normal level 
that I mentioned, maybe 3.2 to 3.5 million barrels a day, you 
have to look at it in terms of costs and in terms of time. A 
year-and-a-half to 2 years, maybe $5- to $6- to $7 billion. 
This is work that can be done by service companies. We're not 
yet involved in granting rights for foreign oil companies to 
come in and develop----
    Mr. Walden. What kind of service companies have that 
capability?
    Mr. Ebel. The ones that you've been reading about in the 
paper.
    Mr. Walden. And are there others that do, or is that pretty 
special----
    Mr. Ebel. Almost any country--you know, France could do it, 
Russia could do it, Germany could do it, Italy could do it. 
It's not a unique expertise by any means.
    Mr. Walden. Three out of four I have a problem with, but go 
ahead.
    Mr. Caruso. Could I add a couple of points to that? I agree 
with the lack of proper maintenance and lack of investment, but 
the glimmer of good news out of this is the Iraqi technical 
competence is quite high.
    Mr. Walden. Among the workers there who weren't part of the 
regime?
    Mr. Caruso. Yes. They've done wonders, given what they've 
been working with.
    Mr. Walden. Is that the same on the power grid? We heard 
about how long it took Baghdad to get back on line, and part of 
that was----
    Mr. Caruso. I'm not sure about the electrical sector, but 
the oil sector, certainly.
    Mr. Ebel. The problem with the power grid is whether it's 
the ``chicken or the egg''. The electric power stations in Iraq 
run on fuel oil, and where does the fuel oil come from? The 
refining of crude oil. If you don't have electricity, you can't 
run the oil pumps or the oil wells; you can't move the oil in 
the pipeline and you can't run the refinery. So it's----
    Mr. Walden. How do you get it started. And isn't it a load 
management issue, the grid?
    Mr. Ebel. It is. It's a distribution problem, both in 
electric power and in petroleum products.
    Mr. Walden. Then as we look at not only the Iraq and Saudi 
Arabia and Kuwait issues, in terms of potential disruption by 
terrorists, refinery capacity and modernization or lack 
thereof, it want to compare it somewhat to what the President 
is proposing, to try and do a better job of developing domestic 
supplies of energy.
    How does what's projected as possible oil supply in ANWR 
compared to what the Iraqi oil levels are, let's say?
    Mr. Ebel. Let me answer that question this way.
    The American consumer doesn't care where his oil comes 
from. He's not bothered by any discussion of energy 
independence. He only has two concerns: one is price, and the 
other is availability. The fact that in the year 2001 we 
imported 800,000 barrels of oil a day from Iraq was not a 
matter of concern to the man on the street.
    We refined that oil, what we took from Iraq. We made some 
jet fuel, we put the jet fuel in certain of our military 
aircraft, and we go bomb Iraq. We returned his oil to him in a 
slightly different fashion. But no, he doesn't care where the 
oil comes from. If we can develop ANWR in a satisfactory 
environmentally accepted fashion, great. But in the end----
    Mr. Walden. I should take you to some of my town meetings. 
They do have a concern about where it comes from.
    Mr. Ebel. Sure. Well----
    Mr. Walden. My point is, put it in perspective here. Is the 
volume estimated to be available in ANWR similar to that which 
was Iraq's output in 1979?
    Mr. Ebel. No. Iraq, in 1979, produced 3.5 million barrels 
of oil and day, and none of the estimates that I have seen for 
ANWR would put potential production levels that high.
    Mr. Walden. What would they put it at? Can somebody address 
that? I'm out of time.
    Mr. Caruso. We did a paper for the Senate last year, for 
actually then Chairman Murkowski, and the mean estimate using 
the USGS resource estimates for ANWR was a peak production of 
about 800,000 barrels a day. But at the high end of USGS, we 
got it up to 1.5. So it was kind of a range there.
    Mr. Walden. So it's about what we were getting from Iraq, 
then, in recent years, the 800,000 barrel estimate that you 
referenced.
    I'm sorry. I'm----
    Mr. Barnes. No, no. It's about half of what we--You mean 
from importing into the United States or----
    Mr. Walden. I thought I heard 800,000 barrels.
    Mr. Barnes. That was imported into the United States. It 
wasn't production. The price----
    Mr. Walden. I was talking about imported into the United 
States.
    Mr. Barnes. I agree with Mr. Ebel. It doesn't matter where 
it comes from.
    Mr. Walden. Well, we may disagree on that, but I understand 
what you're saying.
    Mr. Barnes. It's a global price. It's set globally.
    Mr. Walden. Price has some relationship to available 
supply, doesn't it?
    Mr. Barnes. Yeah, on a global basis.
    Mr. Walden. So if the terrorists shut down the supply in 
one of these countries, or the refineries don't get upgraded 
like they should, and we've got an asset sitting on the north 
slope that we, from a policy standpoint, say we're not going to 
access, that's going to affect price because it affects 
availability. That's the two things my consumers care about 
most, as you said.
    As I said, as we look at our own assets here domestically, 
I have a greater sense of security about our ability to manage 
them and access them than I do about what may or may not happen 
in Kuwait or Iraq or Iran.
    Mr. Barnes. But the main point is, it doesn't matter 
whether it comes here. The question is whether it goes into the 
world oil market, in terms of the disruption, not into the 
United States.
    Mr. Walden. No, but in terms of the overall amount 
available on the world market, that's right. We're not 
disagreeing.
    Thank you.
    Mr. Shimkus. Thank you. I recognize myself for 8 minutes, 
and hopefully I won't take that long.
    But let me start by saying that you've really got to love 
Ralph Hall because he asks some tough questions that our 
constituents want the answers to. And while I basically concur 
with a lot of the assessments, isn't it true, though, that 
there, in essence, can be--and I think we mentioned it at the 
end, Mr. Ebel, and maybe Mr. Barnes, at the end of post-war 
policing and really the cost of reconstruction in essence, if 
we get through all the title issues and stuff, reconstruction 
may greatly exceed the costs of the actual war; isn't that a 
fair statement?
    Mr. Ebel. Many people look to oil revenue as paying all the 
bills. You cannot do that. If Iraq next year was exporting, 
let's say, 2 million barrels a day, at a price of $25 a barrel, 
that would give them an income of $20 billion. It sounds like 
an awful lot. But it isn't when you look at the tremendous 
financial need to get that country back on its feet, not just 
the oil sector, but the entire country's infrastructure--
health, education, roads, housing. There is going to be so many 
hands dipping into that pot that there's not going to be enough 
for everybody.
    Mr. Shimkus. But from our perspective, in the rebuilding of 
Afghanistan, which we're involved in the process with no 
natural resources, and the fact that Iraq has some, does tend a 
lot of us to believe that there will be some ability by their 
act, through their own natural resources, to help bear some of 
the burden of the cost. I mean, wouldn't that----
    Mr. Barnes. Yeah. But you know what? We will have to pay 
part of the tab.
    Mr. Shimkus. Well, we already have.
    Mr. Barnes. It's not going to--As Mr. Ebel said, it is not 
going to be enough, and there will be demands on the U.S. 
taxpayer for years to come associated with the reconstruction 
of Iraq.
    Mr. Shimkus. But for us to make a statement that Iraqi oil, 
their natural resources--I don't think we're disagreeing, but 
in the reconstruction, those dollars, some of it will have to 
focus on and pay for the rebuilding of Iraq. I mean----
    Mr. Barnes. True.
    Mr. Shimkus. Also, I have great respect for the ranking 
member. It was an interesting discussion on the title thing. 
Unfortunately, we play by the rules of law, you know, where if 
we were an Iraqi regime and sell it to Syria, maybe we ought to 
work with Syria to sell hundreds of barrels on the black market 
and help finance it and address the title concerns. Obviously, 
there wasn't a title concern to the end user of the black 
marketed oil. But since we play by the rules, we'll get burned 
with that.
    Until there is a formal regime change and an official 
government of Iraq, whenever that occurs, what we're saying is 
the U.N. is the office of making the determination of how we 
move to, in essence, production and sale and the receipt of 
revenue for the Iraqi people; is that what we're saying?
    Mr. Caruso. The proposed resolution would change that. It 
would authorize the interim government to make sales, to convey 
title.
    Mr. Shimkus. But, in the absence of that, we're stuck with 
the Oil for Food Program and----
    Mr. Ebel. In the absence of that, you cannot export because 
there is no body that can grant legal title to the oil to be 
exported.
    Mr. Shimkus. So the Oil for Food Program expires on June 3, 
if not extended.
    Mr. Ebel. That's correct.
    Mr. Shimkus. And if the Oil for Food Program expires, that 
does not mean that the sanctions imposed--you see, that's where 
I'm having a problem, between the Oil for Food Program and then 
the sanctions. They are really, in essence, a separate part of 
the debate. So if the Oil for Food Program expires, that 
doesn't mean that the sanctions imposed on Iraq by the United 
Nations will expire, does it?
    Mr. Ebel. No, not in itself.
    Mr. Shimkus. So if the sanctions remain and the program 
expires, the Oil for Food Program expires, Iraq could still not 
legally export oil?
    Mr. Ebel. That's correct.
    Mr. Barton. Would the gentleman yield?
    Mr. Shimkus. I would yield, Mr. Chairman.
    Mr. Barton. If the United States and Great Britain 
recognize an Iraqi oil ministry, or an Iraqi oil company, and 
that company sells to a British or U.S. oil company, why would 
that not be legal?
    Mr. Ebel. I go back to my interpretation of what the 
occupying power can and cannot do under the Geneva Convention. 
My reading of the Geneva Convention is that the occupying 
power--in this instance, the United States and Great Britain--
can sell, export the oil, and use the income inside Iraq for 
humanitarian purposes and to pay for the cost of the 
occupation. Therefore, they would be granting legal title to 
the oil.
    I think what we have in mind is, as quickly as feasible, 
setting up an interim Iraqi government----
    Mr. Barton. I understand that.
    Mr. Ebel. [continuing] and then the U.N. recognizing that 
government and then----
    Mr. Barton. And I understand that.
    Mr. Ebel. Right.
    Mr. Barton. But if you've got an intransigent U.N. Security 
Council because of proprietary commercial interests, there is 
nothing to stop the U.S. Government and the British Government 
from recognizing some entity within Iraq that's controlled by 
the Iraqis to sell oil, and as long as the willing purchaser is 
a British owned company or a U.S. owned company or, for that 
matter, any other company that recognizes title, to heck with 
the U.N.
    I mean, they're not going to enforce it, and if you've got 
a willing buyer and a willing seller, and you've got the 
occupying powers, the liberating powers, sanctifying it, 
sanctioning it, that's all you need.
    I mean, I'm not an attorney, and I'm certainly not an 
international attorney. But I believe, if I were an oil buyer, 
and I called the State Department and said the Iraqi interim 
oil ministry wants to sell me 100,000 barrels a day, and I'm 
willing to buy it, will you guarantee the contract, and the 
U.S. State Department says ``yes, as long as it's in U.S. 
courts, you're okay,'' I believe I would do that.
    Mr. Ebel. I think that the U.N. would have to recognize the 
interim Iraqi government as representing----
    Mr. Barton. What if they don't, though? What can the U.N. 
do?
    Mr. Hall. How many divisions do they have?
    Mr. Barton. I mean, what can they do legally--forget 
militarily. Mr. Hall's a hawk and I'm the dove on this.
    Mr. Ebel. I think that's where the resolution comes in, 
yeah.
    Mr. Barton. I understand the nicety of it, but I'm not sure 
of the necessity of it.
    Mr. Barnes. Now, look. Once again, I am not a lawyer, 
either. But I do know that there is--and it's something along 
the lines you're talking about--there has been some talk of 
basic U.S. Government guarantee of title; in other words, a 
promise to indemnify in light of an adverse decision down the 
line. I have seen it in passing, but I cannot speak to the 
details of how you--I think that's close to what you're saying.
    Mr. Barton. I understand the international protocol, and I 
understand why it would be helpful to do exactly what we're 
trying to do in the U.N. today. But my point is, if the French 
and the Russians and the Germans, who have not exactly gone out 
of their way to be helpful, continue to be recalcitrant, I 
don't see any overcomeable, unovercomeable problem, as long as 
the U.S. and the British guarantee the contracts for selling 
the oil.
    Mr. Ebel. If the resolution didn't pass and we wanted to 
move forward, and we wanted to get the oil industry going, and 
if the U.S. and Great Britain were prepared to grant 
indemnification, the oil would flow.
    Mr. Barton. There you go.
    Mr. Shimkus. That was really the follow up. But let me, 
just for my own purpose--and then I'll return the chair back to 
the Chairman--who was the end user, the end purchaser, of the 
black marketed Iraqi oil that went through Syria?
    Mr. Ebel. It worked out in a very interesting way. Most of 
that oil stayed inside Syria, and Syria exported it's own oil, 
taking advantage of high world market prices.
    Mr. Shimkus. And who are the major purchasers of that? Did 
they just throw it on the open market?
    Mr. Ebel. It just goes into the market.
    Mr. Shimkus. I'm sure our European allies received----
    Mr. Barnes. No, no. It's a----
    Mr. Shimkus. Okay. Hold on, Mr. Barnes. I'm a free market 
economic MBA guy, so I understand that, as you add to supply in 
the world market, it affects it. But the reality is, as you add 
the to the supply, prices come down and everyone will benefit 
from that.
    Mr. Barnes. Uh-huh.
    Mr. Shimkus. Even our allies in Europe.
    Mr. Ebel. So, in a way, that smuggled oil was added to the 
world oil market, added to supply.
    Mr. Shimkus. Right.
    Mr. Ebel. Indirectly, but it was added to the supply.
    Mr. Shimkus. And to the benefit of Iraq and Syria, major 
terrorist states.
    Mr. Barnes. And also oil consumers worldwide, as you just 
pointed out.
    Mr. Barton. But somebody pocketed the delta between $8 or 
$9 and $35, and that was not a transparent transaction.
    Mr. Ebel. Right. Most of that ended up back in the pockets 
of Saddam Hussein.
    Mr. Shimkus. My time has expired, and I will recognize the 
gentleman from California, Mr. Issa, and return the chair to 
the Chairman. Thank you.
    Mr. Issa. I guess my first question is, if the U.N. doesn't 
recognize a new entity, does it mean that the old entity still 
exists for purposes of transactions and contracts?
    Mr. Ebel. Well, if the Oil for Food Program comes to an 
end----
    Mr. Issa. No, no. I didn't ask that question. Forget about 
that.
    You had an entity that had contracts--and I'll be the 
devil's advocate because I'm the person most recently in 
Syria--if you, in fact, had a relationship between the old 
government and Syria, oil was pumping and dollars were being 
paid to the old government for the benefit of whatever----
    Mr. Barton. [Presiding.] The old government in Syria or the 
old government in Iraq?
    Mr. Issa. The old government in Iraq. We still have the 
same government in Syria, so far, as of this morning anyway.
    Mr. Barton. You said Syria. That's why I wanted to give you 
a chance to----
    Mr. Issa. But the relationship was between the old 
government of Iraq and the government of Syria. There was no 
new government under U.N. law. Does that mean that the old one 
still exists for purposes of contracts? Certainly the sanction 
is against the old government. You know, you don't really 
sanction a country. You really sanction a government.
    So if the sanctions are still in place, the Oil for Food is 
still in place, then the old government is still in place for 
purposes of the United Nations, isn't that correct?
    Mr. Ebel. I'll give that one to you.
    Mr. Barnes. I was going to defer to you, Mr. Ebel. I don't 
know. I'm not a lawyer, international lawyer. I don't know what 
the status of previous contracts are.
    Mr. Hall. Mr. Chairman.
    Mr. Barton. If the gentleman wouldn't mind.
    Mr. Issa. I would yield.
    Mr. Hall. Am I the only lawyer in this whole dang room?
    Mr. Barton. We hope, at the dias.
    Mr. Hall. Well, I don't like lawyers, either, so I guess 
that puts us all on a level----
    Mr. Barton. You're even a judge. You've even been a judge.
    Mr. Ebel. There is no functioning government in Iraq, but 
contracts do convey, even though governments change.
    Mr. Issa. Okay. So if there's a contract that does convey, 
and if, in fact, Syria were to be willing to turn back on 
under--because there was probably no written contract--under 
terms which would be reasonable and ordinary for the purpose of 
pumping oil through a pipeline that has existed since the 
1950's, then, in fact, the oil pumping, the funds being 
received, and those funds going to what is truly an interim 
government--I mean, going to the oil ministry, at least for 
purposes of rebuilding the internal oil wells--there is nothing 
inherently wrong with that. At least, as non-lawyers, you know 
of no reason that couldn't be done today?
    Mr. Ebel. The pipeline was shut down immediately following 
the military intervention. I am absolutely certain that Syria 
could buy as much oil as it wanted, if they're willing to pay 
the market price.
    Mr. Issa. And they would do that, in a sense, around the 
oil sanctions as the U.N. allowed----
    Mr. Ebel. The pipeline is----
    Mr. Issa. Hold on. The U.N. clearly allowed and knew that 
Jordan, Turkey and Syria were transferring huge amounts of oil 
into their country and paying for it for years. Now, knowing 
that, looking at the U.N. dead in the eye and saying ``Wait a 
second; it was okay for you to do it when Saddam was there. Is 
there any reason that--''
    Mr. Barton. Those were not sanctioned sales. Those were 
these under-the-table illegal sales, isn't that correct?
    Mr. Issa. Well, you know, the funny thing about illegal 
sales, Mr. Chairman, is----
    Mr. Barton. I'm asking. I don't know.
    Mr. Issa. Yes, they were outside of it, but, in fact, the 
whole world knew. It was said on these diases, it was said in 
the United Nations, it was said everywhere. And Jordan and 
Turkey and Syria moved billions of dollars in oil. It benefited 
those countries, it benefited the world oil market, but more 
importantly, it represented a potential revenue stream that 
should have benefited the people of Iraq.
    That continuity, that relationship of those three 
contracts, is there any reason that you know of that those 
three contracts couldn't start flowing again under reasonable 
and ordinary terms? We didn't have transparency, so we'll 
assume that a pipeline pays $2, $3, $4 a barrel for transfer 
fees, whatever, based on the mile and so on, so somebody knows 
what would be fair and reasonable, that that couldn't start 
going again and the dollars flowing to the oil ministry today, 
because there is no new government--clearly, there's an old 
government, and under the old government, for the best part of 
a decade, these oil transfers occurred and we all knew it in 
the international community.
    Mr. Barton. So what's your question?
    Mr. Issa. I'm asking, do you know of any reason that they 
couldn't do it today? I mean, I'm hearing about how you can't 
suddenly have new oil, but you have three relationships that 
could, in fact, do it today, as much as they could do it for 
the intervening years, and France and Germany not only knew 
about it but they purchased that oil.
    Conoco did those transfers in Syria. The world was very 
aware this was going on. Is there any reason that we couldn't 
turn them back on with one, two, or all three of these 
countries for the benefit of the Iraqi people today?
    Mr. Ebel. First of all, you have to raise production.
    Mr. Issa. Why would they have to raise production? They 
were doing it under the old production.
    Mr. Ebel. Current production today would not support 
exports. You have to bring your production back up to meet 
local demand and then, beyond that, those lines become 
available for export. The pipeline was shut down and all 
exports were cutoff the day of the military intervention.
    Mr. Issa. No, actually they were shut off after the 
military intervention was complete.
    Mr. Ebel. Yeah.
    Mr. Issa. There were vehicles at the Turkish border even 
after Baghdad was under fire.
    Mr. Ebel. Using oil, I believe, that had already been 
produced.
    These arrangements between Syria, Turkey and Jordan 
certainly can continue, once legal title can be guaranteed, but 
they would have to buy the oil at arm's length.
    Mr. Issa. Actually, that wasn't the question. The sales 
ultimately were made and, under whatever terms they were made, 
if the oil ministry said today, for example--and I'll use Syria 
because they're the easiest to figure--``Here's a pipeline, 
here's a fee for the pipeline, and the balance comes to us.'' 
You know, Syria is not going to buy it at $28. They're going to 
buy it at essentially what they get at their port. They take $4 
and the balance goes to Iraq. That's the effective price that 
would have normally occurred prior to the war, had there been a 
pipeline fee being paid.
    I guess my question is----
    Mr. Barton. And this will have to be the last question of 
this round, because you're about 2 minutes over.
    Mr. Issa. I apologize.
    Mr. Barton. But I did take some of your time.
    Mr. Issa. I'll finish with an easier question.
    What damage occurred to the oil wells that would cause the 
400,000 barrels a day that were going out through these three 
other countries to not be available today? What physical damage 
occurred that I don't know about?
    Mr. Ebel. Normally, you do take a chance when you shut in 
oil wells, you take a chance that, when you bring it back into 
production, they will have lost some pressure and you might not 
get the yield that you got before.
    But again, you have to take steps to raise production to 
beyond what you need domestically before you have any surplus 
available for export. Iraq has not yet reached that point. 
Moving gradually toward it, step by step. But it's going to be 
a while yet before they're able to export volumes in any 
significant amount.
    Mr. Issa. Mr. Chairman, for the record, that's not a 
responsive answer, and I apologize for----
    Mr. Barnes. I can answer. Extensively, people not turning 
up for work is two of the major reasons that there's not been 
production increases.
    Mr. Issa. Thank you.
    Mr. Barton. The chair is going to recognize himself for 
questions, for such time as he may consume, until another 
member comes in or until Mr. Issa decides that he wants to ask 
some. And this is going to be very informal, unless we get more 
members, in which we'll go back to the regular order.
    I want to go back to something you said, Mr. Ebel, about 
only 25 percent of the proceeds under the U.N. program actually 
ended up going for food and the rest of the money was spent--I 
believe you said in 23 different sectors. Was that legally 
allowed, or was this another case, as Mr. Issa pointed out, of 
just a wink and a nod?
    Mr. Ebel. That was the approved approach under the U.N. Oil 
for Food Program.
    Mr. Barton. So this concept in the general public, that we 
were allowing oil to be sold on the world market by the Iraqi 
oil companies so that we could provide food and medicine, that 
really wasn't the case. That was just kind of a cover.
    Mr. Ebel. It gave the average person the implication that 
virtually all the money would be going for food. Of course, the 
numbers don't show that. The numbers support just as you had 
stated, 25 percent.
    Mr. Barton. So it really wasn't an Oil for Food Program. 
Were any of the proceeds allowed under the sanctions to go to 
Saddam Hussein's military?
    Mr. Ebel. No.
    Mr. Barton. So they didn't go quite that far?
    Mr. Ebel. No.
    Mr. Barton. But they could purchase in these 23 different 
sectors and the Iraqi government could obviously purchase 
things that could have a military purpose legally?
    Mr. Ebel. Contracts were vetted very, very carefully to 
make sure that no dual use items appeared.
    Mr. Barton. Very, very carefully?
    Mr. Ebel. Yes.
    Mr. Barton. Just as carefully as the U.N. administered the 
Syrian pipelines and things that Mr. Issa was talking about, 
that same degree of carefulness?
    Mr. Ebel. The oil that was moved by pipeline to Syria was 
outside the U.N. Oil for Food Program.
    Mr. Barton. Well, it wasn't.
    Mr. Ebel. But the world knew about it----
    Mr. Barton. None of the oil was supposed to be outside the 
program.
    Mr. Ebel. The world knew about it, and knew about the 
arrangements with Turkey and Jordan, but a wink and a nod and 
it continued.
    Mr. Barton. In a legal, technical sense, was Saddam 
Hussein's government allowed to sell off-sanctioned oil? Was 
that part of the program? Were they allowed to do that? We know 
they did, but they shouldn't have been allowed.
    Obviously, the only oil that was supposed to go out under 
the program was supposed to go in these sanctioned sales and 
the proceeds used in these prescribed areas. Were they allowed 
to kind of have ``bootleg'' oil? Was that part of the program?
    Mr. Caruso. The only exception was to Jordan. That was 
actually recognized as being a bilateral separate arrangement.
    Mr. Barton. But the Syrian connection that Mr. Issa 
mentioned, that was not? It just wasn't enforced.
    Mr. Caruso. That's right.
    Mr. Ebel. Correct.
    Mr. Barton. I know you all aren't combative about this, but 
excuse me if I'm not real impressed with the ability of the 
U.N. oil administrator to enforce this program.
    If we were under a UN-administered sanctioned program, why 
did we allow Saddam Hussein to pick his contractors? Why was 
that not done by the U.N. administrator?
    Mr. Ebel. I can't answer that question, Mr. Chairman. I do 
not know.
    Mr. Barton. I mean, why would you let somebody who just 
invaded another country, in which you organized an 
international coalition of forces to liberate that country, and 
then impose these sanctions to prevent the rebuilding of the 
military of the invader, i.e., Saddam Hussein, why would you 
then turn around under an international U.N. sanctioned 
program, designed to help the Iraqi people, and let the 
dictator who organized the invasion pick his contractors? Why 
wouldn't the U.N. do it?
    Mr. Barnes. I must note that the dual use--there was a 
special dual use committee that examined all the tenders, okay? 
Actually, it was a serious committee. There were U.S. 
representatives on that committee.
    Vis-a-vis the other matter, I guess the general concept is 
we're talking about a country of 30 million people and 
essentially their entire imports. I guess the idea is, if you 
thought there was a lot of delay in issuing tenders under the 
U.N. system, can you imagine the U.N. deciding, somebody at the 
U.N. deciding every single bolt and light bulb that has to be 
imported by Iraq?
    Mr. Barton. How in the world could a U.S. representative 
allow Saddam Hussein--One of you testified, either Mr. Barnes 
or Mr. Ebel, that beginning around the year 2000 Saddam Hussein 
began to pick contracts purely on political grounds to try to--
you didn't use the word ``buy off'', but to try to----
    Mr. Barnes. It was the dual use thing, to ensure that there 
were no imports of things that could be used for military 
purposes, which was correctly our No. 1 priority, my 
impression.
    Mr. Barton. Say that again?
    Mr. Barnes. The dual use committee were examining the 
tenders to ensure that Iraq was not importing weaponry, or 
civilian goods that could be used as weapons, okay? That was a 
separate issue than both the ascertainment of prices on export 
and the broader approval of tenders for light bulbs. In other 
words, my impression is the U.S. took a great deal of care and 
interest in the dual use question to ensure that Iraq was 
denied technologies that had military use.
    Mr. Barton. It really seems to me that this program has 
never been audited, in a sense that we would understand an 
audit to be, who had a U.N. administrator who has apparently 
operated in the shadows, who allowed Saddam Hussein to pick his 
contractors, and who winked and nodded at huge amounts of oil 
that were used for purposes totally contrary to the reason the 
sanctions were imposed in the first place, that there's any 
reason for this program to continue to exist.
    I have one more question. The number that I'm given that's 
in the escrow account right now is in the neighborhood of $12 
billion. Is that a good estimate?
    Mr. Ebel. In reality, I've seen $10.8 billion.
    Mr. Barton. Mr. Barnes?
    Mr. Barnes. I've heard about $13 billion, which was closer 
to your number, of which $10 billion is basically obligated. In 
other words, they've identified contracts on things to buy, and 
$3 billion that's not obligated. That's my general sense.
    Mr. Barton. Mr. Caruso, do you have a----
    Mr. Caruso. That's the range that we've been----
    Mr. Barton. Does the EIA have the authority to find out 
officially how much is in that account, and if so, would you do 
so?
    Mr. Caruso. Certainly we'll----
    Mr. Barton. I'm going to try to find out through 
congressional inquiries, but if you could find out, too, we 
would appreciate it.
    Mr. Barnes. But do recall--it's an important question, that 
there are two sorts of funds, the funds they have already 
identified, Russian widget manufacturers to export, and then 
the funds of which there's been no obligation whatsoever. I do 
know that there is some question, even in the U.S. resolution, 
that there is some interest in the U.S. saying, ``Look, at 
least turn over those nonobligated funds post-haste.'' Mr. 
Barton. Now, I have another question. There has been reported 
in the public press that Saddam Hussein had signed some 
contracts with Russian companies and then had abrogated those 
contracts. Now the Russians want the contracts that Saddam 
himself or his agents had abrogated, that those contracts be 
honored.
    Does this panel have a position on those contracts?
    Mr. Ebel. Back in 1997, Russia had signed a contract with 
the government of Iraq to develop the West Kurna oil field, 
down in the southern part of the country. It's a major, major 
oil field that, at its peak, might be providing 700,000 barrels 
of oil a day. So it's a prize that you do not give up very, 
very quietly.
    But, remember, the U.N. sanctions were in place and no 
company could go in and develop an oil field, so Russia had 
just sat quietly and took no action to develop the field. Iraq 
said okay, because you're not responding to the terms of the 
contract, we are abrogating the contract.
    Russia then subsequently sent in a very high level 
delegation, got the contract renewed, put back on track, but 
soon thereafter Saddam Hussein said no, we're canceling it 
again. Russia will argue that contract sanctity is preserved in 
a change of government. I would think that, based on my 
conversations with the Iraqi opposition, they would say let's 
review the terms of all contracts that have been signed with 
the past government of Saddam Hussein, to make certain that 
they are in the interest of the Iraqi people.
    Mr. Barton. Is there an international precedent when a 
government, especially an unsavory government, is removed from 
power, that the contracts that government signed are routinely 
honored when there is a new government that's more 
internationally recognized put in place? When Nazi Germany fell 
in 1945, were their contracts honored by the occupying powers 
and the international community, or were they just abrogated?
    Mr. Ebel. There is a feeling among the Iraqi opposition 
that, based on the success in Iraq, let's tear up all contracts 
and start all over again.
    Mr. Barton. Is that a generally a precedent that is 
recognized?
    Mr. Ebel. Generally speaking, no. Generally speaking, you 
know, the world turns on contract sanctity.
    Mr. Issa. Mr. Chairman?
    Mr. Barton. The gentleman from California.
    Mr. Issa. If you would yield for a second.
    Mr. Barton. Surely.
    Mr. Issa. Perhaps the appropriate question is, has the 
Soviet Union ever paid the Russian Tsar's debts or honored 
their contracts?
    Mr. Barton. Or the Communist Chinese. I mean, there are any 
number of----
    Mr. Issa. The actual parties that are now asking for 
contract sanctity have no such record of honoring their own 
debt.
    Mr. Barton. Or Imperial Japan at the end of the war. There 
are all kinds of precedents, or when North Vietnam invaded 
South Vietnam.
    Mr. Barnes. It's a complicated--I mean, I'm not a lawyer, 
but, for instance, there's the question of treaties. We do know 
that, after discussion, we did determine, for instance, that 
Russia did have to comply with treaties entered into by the 
Soviet Union with the United States.
    Mr. Issa. That's Soviet to Russia, not Russia to Soviet.
    Mr. Barnes. Right. But I'm just pointing out that--I know 
that there is a certain amount of conveyance that occurs in 
things, and I'm not sure how much case law there is. But some 
conveyance does occur.
    Mr. Barton. Let me ask on the Russian contracts that are in 
question in the media, were those sanctioned under the U.N. 
sanctions? Did Saddam Hussein have the right, at that time, to 
enter into that contract according to the U.N. sanctions in 
place at that time?
    Mr. Ebel. You can enter into a contract, but the 
contracting company--in this case, the Russian company--could 
not perform under the contract as long as sanctions were in 
place, and Russia did not perform under the contract.
    Mr. Barton. But Russia had the right to sign the contract?
    Mr. Ebel. They signed the contract with the Iraqi 
government.
    Mr. Barton. I'm not sure I can one way or the other as a 
person, but as a Member of Congress, I have to care.
    Mr. Ebel. I'm sure that if the sanctions were taken off, 
Russia would go in and start work under the contract.
    Mr. Barton. But would that contract have been submitted to 
the U.N. before it was signed?
    Mr. Ebel. No.
    Mr. Barnes. No.
    Mr. Barton. Did Saddam Hussein have to submit--should he 
have submitted it?
    Mr. Ebel. No.
    Mr. Barton. He did not have to?
    Mr. Ebel. He did not.
    Mr. Barton. My staff says he could have produced the oil, 
but had he produced it, the oil would have gone through the 
United Nations, which is why he didn't do it.
    Mr. Ebel. That's right. He couldn't do it.
    We had an interesting visitor at CSIS last Monday, George 
Sorells. He was speaking at a luncheon meeting that we had. And 
to broaden your question, he thought that all lending that the 
international financial institutions had made to the Iraqi 
government should be dissolved, wiped off the books, carrying 
the message that international financial lending institutions 
in the future should think twice before they loan money to a 
terrorist regime.
    Mr. Barton. I want to go back to this money in the escrow 
account, somewhere between $10-13 billion, of which perhaps $10 
billion has already been obligated.
    Is there an alternative mechanism in place, a financial 
institution, an economic institution, that could take 
possession and administer those funds? Could you put it through 
the World Bank? Could you put it through the International 
Monetary Fund? Could you put it through USAID, or the 
international energy agency that the U.S. is a part of?
    Mr. Ebel. I think the resolution being submitted to the 
United Nations provides for a role, not just for the United 
Nations, but of several international financial institutions 
for oversight.
    Mr. Barnes. For financial oversight.
    Mr. Barton. But we wouldn't have a problem finding a place 
to put that money?
    Mr. Barnes. I don't see the IMF issuing tenders for light 
bulbs.
    Mr. Ebel. No.
    Mr. Barnes. Which is basically what a lot of this stuff is.
    Mr. Barton. The answer I want to hear is the U.N. is not 
the only place that we could administer the existing funds. 
There is someplace else that could do it.
    Mr. Ebel. Yes.
    Mr. Barton. This is my last question, unless Mr. Issa has a 
question. Mr. Issa, do you wish to ask any more questions 
before we conclude?
    Mr. Issa. No, I'm enjoying yours.
    Mr. Barton. Is there any reason, given all the evidence in 
the past and what has happened in the present, and what we 
expect to happen in the future, that the U.S. Government and 
the international community should continue to sanction the 
existence of the U.N. so-called Oil for Food Program?
    Mr. Ebel. No, not in my judgment.
    Mr. Barton. Mr. Caruso?
    Mr. Caruso. No. It's unnecessary.
    Mr. Barton. Mr. Barnes?
    Mr. Barnes. Phase it out and turn it over to the interim 
government as soon as possible.
    Mr. Barton. Well, my staff wants me to ask one more 
question. I thought that was a great question to end on. We got 
the answer we wanted.
    Mr. Issa. Mr. Chairman, we can always reverse the order in 
which it's published.
    Mr. Barton. Oh, I don't mind.
    What would be the consequences if oil sales to the 
international community resumed, the Oil for Food Program 
expired, but yet the sanctions remain in place?
    Mr. Issa. They're telling you to end on the previous 
question.
    Mr. Ebel. The sanctions have to be off, period.
    Mr. Barton. Mr. Barnes?
    Mr. Barnes. I'm not a lawyer. We seem to be saying that a 
lot today. I agree. You have to have the sanctions taken off, 
or the Oil for Food Program continued. As we have all agreed, 
there is no reason to continue the Oil for Food Program.
    Mr. Barton. Mr. Caruso?
    Mr. Caruso. I think the major companies would be unwilling 
to take that kind of risk.
    Mr. Barton. Unless the U.S. Government and the British 
Government and other governments indemnified----
    Mr. Barnes. Yes, offered to indemnify.
    Mr. Barton. I just have to believe that British Petroleum 
and Royal Dutch Shell, ExxonMobile and some of the Japanese 
companies, as long as the military power is in control 
guarantees that----
    Mr. Barnes. And then Total would be willing to buy, too, if 
it was guaranteed.
    Mr. Barton. I beg your pardon?
    Mr. Barnes. Total would be willing to buy it, too, if it 
was guaranteed.
    Mr. Barton. Yes. So in a real world sense, it's not a 
necessity, and in an international political sense, it would be 
helpful. That would be my answer to that.
    I want to thank you gentlemen for coming. This has been an 
excellent hearing. This is a major issue that's in play right 
now. I am going to be officially asking the U.N. for some 
answers to the same questions we have asked you gentlemen. I am 
also going to be asking the Bush administration to help in 
getting those answers. And, Mr. Caruso, if you could give us as 
much information as you can obtain about the status of the 
existing funds, I would appreciate that very much.
    This hearing is adjourned.
    [Whereupon, at 12:10 p.m., the subcommittee adjourned.]

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