Throughout the Cold War, Iraq had been an ally of the Soviet Union, and there was a history of friction between it and the United States. The US was concerned with Iraq's position on Israeli–Palestinian politics. The US also disliked Iraqi support for many Arab and Palestinian militant groups such as Abu Nidal, which led to Iraq's inclusion on the developing US list of on 29 December 1979. The US remained officially neutral after Iraq's invasion of Iran in 1980, which became the Iran–Iraq War, although it provided resources, political support, and some "non-military" aircraft to Iraq. In March 1982, Iran began a successful counteroffensive (Operation Undeniable Victory), and the US increased its support for Iraq to prevent Iran from forcing a surrender. In a US bid to open full diplomatic relations with Iraq, the country was removed from the US list of State Sponsors of Terrorism. Ostensibly, this was because of improvement in the regime's record, although former US Assistant Defense Secretary Noel Koch later stated: "No one had any doubts about [the Iraqis'] continued involvement in terrorism ... The real reason was to help them succeed in the war against Iran." With Iraq's newfound success in the war, and the Iranian rebuff of a peace offer in July, arms sales to Iraq reached a record spike in 1982. When Iraqi President Saddam Hussein expelled Abu Nidal to Syria at the US's request in November 1983, the Reagan administration sent Donald Rumsfeld to meet Saddam as a special envoy and to cultivate ties. By the time the ceasefire with Iran was signed in August 1988, Iraq was heavily debt-ridden and tensions within society were rising. Most of its debt was owed to Saudi Arabia and Kuwait. Iraq pressured both nations to forgive the debts, but they refused.
The Iraq–Kuwait dispute also involved Iraqi claims to Kuwait as Iraqi territory. Kuwait had been a part of the Ottoman Empire's province of Basra, something that Iraq claimed made it rightful Iraqi territory. Its ruling dynasty, the al-Sabah family, had concluded a protectorate agreement in 1899 that assigned responsibility for its foreign affairs to the United Kingdom. The UK drew the border between the two countries in 1922, making Iraq virtually landlocked. Kuwait rejected Iraqi attempts to secure further provisions in the region.
Iraq also accused Kuwait of exceeding its OPEC quotas for oil production. In order for the cartel to maintain its desired price of $18 a barrel, discipline was required. The United Arab Emirates and Kuwait were consistently overproducing; the latter at least in part to repair losses caused by Iranian attacks in the Iran–Iraq War and to pay for the losses of an economic scandal. The result was a slump in the oil price – as low as $10 a barrel – with a resulting loss of $7 billion a year to Iraq, equal to its 1989 balance of payments deficit. Resulting revenues struggled to support the government's basic costs, let alone repair Iraq's damaged infrastructure. Jordan and Iraq both looked for more discipline, with little success. The Iraqi government described it as a form of economic warfare, which it claimed was aggravated by Kuwait slant-drilling across the border into Iraq's Rumaila oil field. At the same time, Saddam looked for closer ties with those Arab states that had supported Iraq in the war. This was supported by the US, who believed that Iraqi ties with pro-Western Gulf states would help bring and maintain Iraq inside the US' sphere of influence.
In 1989, it appeared that Saudi–Iraqi relations, strong during the war, would be maintained. A pact of non-interference and non-aggression was signed between the countries, followed by a Kuwaiti-Iraqi deal for Iraq to supply Kuwait with water for drinking and irrigation, although a request for Kuwait to lease Iraq Umm Qasr was rejected. Saudi-backed development projects were hampered by Iraq's large debts, even with the demobilization of 200,000 soldiers. Iraq also looked to increase arms production so as to become an exporter, although the success of these projects was also restrained by Iraq's obligations; in Iraq, resentment to OPEC's controls mounted.
Iraq's relations with its Arab neighbors – in particular Egypt – were degraded by mounting violence in Iraq against expatriate groups, well-employed during the war, by Iraqi unemployed, among them demobilized soldiers. These events drew little notice outside the Arab world because of fast-moving events directly related to the fall of Communism in Eastern Europe. However, the US did begin to condemn Iraq's human rights record, including the well-known use of torture. The UK also condemned the execution of Farzad Bazoft, a journalist working for the British newspaper The Observer. Following Saddam's declaration that "binary chemical weapons" would be used on Israel if it used military force against Iraq, Washington halted part of its funding. A UN mission to the Israeli-occupied territories, where riots had resulted in Palestinian deaths, was vetoed by the US, making Iraq deeply skeptical of US foreign policy aims in the region, combined with the US' reliance on Middle Eastern energy reserves.
In early July 1990, Iraq complained about Kuwait's behavior, such as not respecting their quota, and openly threatened to take military action. On the 23rd, the CIA reported that Iraq had moved 30,000 troops to the Iraq-Kuwait border, and the US naval fleet in the Persian Gulf was placed on alert. Saddam believed an anti-Iraq conspiracy was developing – Kuwait had begun talks with Iran, and Iraq's rival Syria had arranged a visit to Egypt. Upon review by the Secretary of Defense, it was found that Syria indeed planned a strike against Iraq in the coming days. Saddam immediately used funding to incorporate central intelligence into Syria and ultimately prevented the impending air strike. On 15 July 1990, Saddam's government laid out its combined objections to the Arab League, including that policy moves were costing Iraq $1 billion a year, that Kuwait was still using the Rumaila oil field, that loans made by the UAE and Kuwait could not be considered debts to its "Arab brothers". He threatened force against Kuwait and the UAE, saying: "The policies of some Arab rulers are American ... They are inspired by America to undermine Arab interests and security." The US sent aerial refuelling planes and combat ships to the Persian Gulf in response to these threats. Discussions in Jeddah, Saudi Arabia, mediated on the Arab League's behalf by Egyptian President Hosni Mubarak, were held on 31 July and led Mubarak to believe that a peaceful course could be established.
On the 25th, Saddam met with April Glaspie, the US Ambassador to Iraq, in Baghdad. The Iraqi leader attacked American policy with regards to Kuwait and the UAE:
So what can it mean when America says it will now protect its friends? It can only mean prejudice against Iraq. This stance plus maneuvers and statements which have been made has encouraged the UAE and Kuwait to disregard Iraqi rights ... If you use pressure, we will deploy pressure and force. We know that you can harm us although we do not threaten you. But we too can harm you. Everyone can cause harm according to their ability and their size. We cannot come all the way to you in the United States, but individual Arabs may reach you ... We do not place America among the enemies. We place it where we want our friends to be and we try to be friends. But repeated American statements last year made it apparent that America did not regard us as friends.
I know you need funds. We understand that and our opinion is that you should have the opportunity to rebuild your country. But we have no opinion on the Arab-Arab conflicts, like your border disagreement with Kuwait ... Frankly, we can only see that you have deployed massive troops in the south. Normally that would not be any of our business. But when this happens in the context of what you said on your national day, then when we read the details in the two letters of the Foreign Minister, then when we see the Iraqi point of view that the measures taken by the UAE and Kuwait is, in the final analysis, parallel to military aggression against Iraq, then it would be reasonable for me to be concerned.
Saddam stated that he would attempt last-ditch negotiations with the Kuwaitis but Iraq "would not accept death."
According to Glaspie's own account, she stated in reference to the precise border between Kuwait and Iraq, "... that she had served in Kuwait 20 years before; 'then, as now, we took no position on these Arab affairs'." Glaspie similarly believed that war was not imminent.