Sadly, the freaks we are dealing with are not rational, and thus rational thinking does not always win out.
Also, something like smallpox is likely to be a final strike on the way out. When Saddam is a few hours from being removed from power (and possibly life) is when he would release something like this. He would see the threat of this as a way of maintaining power.
Also, Saudi Arabia and others would blame it on Israel anyway.