How the world turns: Libya, whose intelligence chief was dispatching terrorists to murder Americans not so long ago, is suddenly one of America’s key allies in the war against al Qaeda.

Or at least that’s the official line.

“Excellent,” is how one administration official who deals with Libya described the regime’s recent level of cooperation with U.S. intelligence.

But a suspect in the alleged plot to bomb Manhattan’s Hudson River tunnels apparently didn’t get the memo. He fled from Syria for Libya, where he was promptly arrested, according to The Washington Post, citing the commander of Lebanon’s Internal Security Forces.

The FBI considers the matter of chumming up with the Libya’s once-odious intelligence chief, Musa Kusa, who authored terrorist plots against the United States, so distasteful that it was uncharacteristically mum about the collar last week.

But to one former U.S. intelligence official, the administration’s sudden all-is-forgotten swoon for Muammar El-Qaddafi is less about Libya’s cooperation with the FBI or CIA than finding new oil.

“It’s all about oil and Halliburton,” said this otherwise staunch Republican. “We want them to be our friends because we want their oil.”

Which is why, he and others said, when three top State Department officials quietly flew off to Tripoli last week, the agenda was new business ventures in Libya, not the unfinished business of the Americans murdered by Qaddafi’s secret agents in the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland.

Once upon a time, the U.S. government demanded Libya compensate the 270 families who lost loved ones in that terrorist attack, as part of the price for a resumption of relations.

Successive U.S. administrations also expressed support for a lawsuit against Libya for its agents’ 1986 bombing of a German discotheque, which killed two Americans and badly maimed scores of off-duty U.S. servicemen and women.

Under U.S. pressure, the Libyans eventually confessed to both crimes and promised to pay as much as $10 million to each of the Flight 103 families, as well as to compensate the families of the dead and survivors of the discotheque bombing.

But after Qaddafi renounced his nuclear weapons program — which a number of experts say was going nowhere anyway — that was enough for the Bush administration.

Suddenly the families were of no concern to an administration that is pursuing al Qaeda by all means necessary.

On Thursday, July 13, the House sent the Senate an appropriations bill (HR 5672) with an amendment, championed by Rep. John E. Sweeney, R-N.Y., that would prohibit the government from funding any activities related to restoring diplomatic relations with Libya until Qaddafi antes up the promised $2 million to each of the PanAm 103 families.

“Obviously, the views of Congress are important to us,” a State Department spokesman said about the measure. “Obviously, we need to consult with Congress. We need to take into account the views of Congress. And we have done that and will continue to do that.”

Obviously, Foggy Bottom is again out of step with the White House.

In its Statement of Administration Policy on the bill, the White House expressed concern over any measures “that purport to direct or burden the conduct of foreign relations, and of negotiations with foreign countries.”

That little rocket apparently rattled the Senate, which had unanimously approved a June 7 resolution, sponsored by Frank R. Lautenbeg, D-N.J., and Lindsey Graham, R-S.C., asking the administration to not credential any Libyan officials here unless the regime shows it is working ‘in good faith to resolve” the Pam Am 103 and disco bombing disputes.

At present there are “no plans” to pursue a Sweeney-like amendment in the Senate, according to a legislative aide close to the issue who asked not to be identified.

Back in the House, members could only sputter.

“Congress will continue to pressure Libya to do the right thing and provide these families with the only measure of accountability they will ever see — total payment as agreed upon,” Sweeney said in an e-mailed statement.

New Jersey Democrat Robert E. Andrews, who had cosponsored a resolution (H Res 838 ) advising the Bush Administration not to accept the credentials of Libyan officials until the Pan Am 103 case was resolved, rejected the White House’s attitude that Congress should stay out of its conduct of foreign operations.

“Sure we should get involved,” he said in a brief telephone interview. “We’re United States congressmen!”

Reginald Borders, a GI from Memphis who was badly wounded by the bomb Libyan terrorists planted in the German disco in 1986, has an idea that has as much of a chance as Congress settling things with Qaddafi.

“Even now, with my injuries, I’d like him to meet me like a man in the open and we can get this thing over with,” Borders said in a recent letter posted at Libyanews.com. “I suggest baseball bats as the diplomatic tools of choice, and Wrigley Stadium as the diplomatic venue.”

Sure, and maybe one of the CIA agents, clinking glasses today with Libya’s top terrorist, Musa Kusa, can hold his coat.

Leak Soup: If that alleged plot to blow up the tunnels under the Hudson River was so important, how come it leaked?

At face value, the plot seemed to have tentacles here and abroad that were worth following up, rather than blowing out of the water in the New York Daily News. Other mainstream media added details over the following days.

So once again, the administration harvested little more than ridicule for nabbing what looked more like a piddling group of wannabees than the real bad guys who are out to get us.

How did that happen? The usual suspects were blamed—administration officials and hawkish politicians peddling fear to rationalize extreme counterterrorism measures.

Republican Rep. Peter T. King of New York, chairman of the House Homeland Security Committee, was considered the prime suspect because the Daily News quoted him extensively.

No, a source close to the story indicated, without giving up who it was.

But two very plugged in intelligence officials, from separate agencies, pinned blame squarely on the Department of Homeland Security.

In one version, DHS chief Michael Chertoff “was mouthing off about it all over town” before the story broke, according to an FBI source, and it inevitably seeped out.

“I hate DHS,” the source added, a sentiment shared widely, but privately, around the FBI.

But a very well-connected source in the Directorate of National Intelligence cranked his artillery down a notch.

“Charlie Allen did it,” he said, referring to the veteran CIA official who took over DHS’ information-gathering shop last year

“It was Charlie Allen,” he repeated, wagging a finger, certain.

Why? To show that he was in the loop, the source said.

A query to an Allen spokesperson Friday afternoon was not returned.

Another explanation for the leak was that the FBI wanted to rush its own, self-serving version of the investigation into the New York Daily News — not the first time that’s happened.

But the simplest explanation — outside of the Daily News spilling the beans — is that the alleged plot was about to surface in Beirut in a few days anyway. All the U.S. agencies involved in the case wanted to get out in front of it.

According to a senior FBI official, the Lebanese suspect was about to be moved from the hands of the internal security police into the criminal justice system, where his name would have become public.

Plans were for the FBI-led Joint Terrorism Task Force and other New York officials to announce the bust then. Instead, it was leaked first.

“So we just got the jump on them by two days,” the official said, shrugging.

Jeff Stein can be reached at jstein@cq.com