The New York Democrat and the Nevada Republican see their legislation as an end-around the Iraqi political debate over an oil law and a measure to rally Iraqis while ensuring oil transparency.
If approved, the State Department must give the Iraqi government an "oil trust plan" and certify it to six congressional committees within 90 days of enactment of the legislation.
If the department fails to do so, 10 percent of certain reconstruction aid in the Economic Support Fund to Iraq would be withheld immediately, and another 10 percent every 30 days until the certification is completed.
Though there are no details yet, a Clinton aide speaking on background said that Iraqis would receive a percentage of oil sales after the government allocates funds for reconstruction and other needs.
While Iraq is a "sovereign government," the aide said, "a strong plan presented by the U.S. government would offer a solution to the oil revenue political problems that they have and ensure there will be domestic Iraqi political support for this."
Iraq's Parliament is deadlocked over which direction to take their oil sector and, in effect, the country as a whole.
"A U.S. demand for Iraqis to establish a trust fund, I'm not sure how that will be received," said Yahia Said, director for the Middle East and North Africa at the Revenue Watch Institute.
He said the offer of technical assistance to develop such a revenue-sharing strategy may be better than an ultimatum. "It's another thing to say, 'We'll withhold aid funding unless you accept this system for dividing your revenues.'"
Said, an expert in Iraqi oil revenue issues, added, "The Iraqis themselves have been grappling with various options of that in terms of how to manage oil funds beyond investment spending by the Iraqi government."
Iraq's government and bureaucratic institutions were decimated by the 2003 war and subsequent purging of mid- and high-level employees from the Saddam regime. U.S. efforts over the past five-plus years to rebuild Iraq's institutional capacity to spend money have only recently been effective. A large portion of Iraq's capital budget has gone unspent and remains in a U.N.-mandated bank account in New York.
Iraqis are currently benefiting from oil sales, however, including electricity from the national grid at no cost and subsidized fuel. Education, healthcare, public-sector jobs and a growing number of reconstruction projects are also paid for by the record oil revenues. But U.S. and Iraqi efforts have been unable to deliver a sufficient quality and quantity of those services and more to Iraqi citizens.
Meanwhile, political leaders are stuck on new laws governing distribution of revenue, one of the underlying reasons there is deadlock in Parliament. Iraq's leaders are split over how much say the central government or local governments should have over development of oil and gas resources, how to rebuild the once prominent domestic oil industry, and to what extent international oil companies should be allowed access to the third-largest proven oil reserves in the world.
With the spike in oil prices this year, oil sales already have covered Iraq's budget, adding weight to control over revenue decisions. The dispute over how to redistribute the wealth among political, religious and ethnic lines via a revenue-sharing law is part of a larger debate over a draft oil law and other legislation.
Said of the Revenue Watch Institute said there are successful and popular models of oil trust funds -- Alaska, for one -- but "the details of it are the most important thing."
The Alaska Permanent Fund, established in 1976, mandates that at least 25 percent of the state's oil and gas revenue be invested in capital markets. The state chooses how to spend the earnings from the investments, typically as dividend payments to citizens.
The Clinton aide said the Alaska model was "inspiration for the idea of an oil trust" but that the State Department "should develop a plan for Iraq so it fits Iraq's needs and provides several options."