Thursday, July 21, 2005

Economists add up the oil-for-food payoffs :: NYT
A new study (pdf) by Chang-Tai Hsieh and Enrico Moretti, two economists at the University of California, Berkeley, sheds light on just how much corruption could have taken place in exchange for oil sales in the oil-for-food program. Although their estimate greatly exceeds the Central Intelligence Agency's figure, the amount of kickbacks and political favors given for lucrative oil deals was still fairly limited, probably no more than 3 percent of the total oil revenue collected, they concluded.

The methods used by Professors Hsieh and Moretti clearly show how economics can be used to gauge the extent of corruption.
. . .
Oil is a commodity, so a given grade of crude oil should trade for the same price.

Here is why the price matters. Suppose that Iraq's leaders sought bribes or political favors, and that the market price of crude oil was $50 a barrel. If Iraq offered to sell its oil for $50, then buyers would have no incentive to provide kickbacks for the privilege of buying Iraqi oil; they could have bought the same grade of oil for the same price from another supplier without having to pay kickbacks. To give buyers an incentive to pay kickbacks, Iraq would have to underprice its oil.

The Berkeley professors have amassed compelling evidence that Iraq underpriced its oil, in all likelihood for the purpose of obtaining bribes and political favors.
. . .
In the 15 years before the oil-for-food program began, there was no difference in price between either type of Iraqi oil and that of its closest competitor, on average. When the program was in effect, however, the price of Basra light fell more than $2 a barrel below the price of Arabian light, and the price per barrel of Kirkuk oil was 70 cents below Urals oil.
. . .
In response to rumors that bribes were being paid for Iraqi oil, the United Nations switched in September 2001 to a retroactive pricing system, in which buyers learned the price of oil only after it was loaded onto their tankers and the world price was known. This made it much harder for Iraq to charge less than the market price - and, in fact, there is little sign of underpricing after 2001.

Although not all 1,300 oil transactions during the program could be examined in detail, the pattern of traders selected to buy oil by the Iraqi regime hints of corruption. In periods when Iraqi oil was underpriced the most, small traders were much more likely to be selected than major oil companies, which are probably less likely to pay kickbacks.

Over the entire life of the oil-for-food program, Professors Hsieh and Moretti estimate, oil was underpriced by $6 billion, with this extra profit divided almost equally between small and large companies.
Thanks to Lawrence of Salt Springs for the pointer.



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