Iraq is coming apart before our eyes, undoing much of the economic progress that a couple of years of stability had afforded it. While it’s premature to call this a civil war, there’s little doubt that’s where things are headed, especially after a powerful Shiite cleric urged his followers to take up arms against Sunni militants during Friday prayers.
So far the action has been in the north, home to some but not much of Iraq’s productive oil reserves. The vast majority of Iraq’s more than 3 million barrels of daily oil production comes from the southern parts of the country. This has largely kept Iraq’s oil flowing. There’s been no loss of oil production in Iraq, nor a loss of the 2.5 million barrels per day of exports out of the southern port of Basra.
Some analysts think the violence and the collapse of the Iraqi army in the north has given the Kurds an opportunity to further exploit Baghdad’s weakness and sell more of their oil. The problem is, it’s not clear that anyone wants to take it. A Kurdish tanker loaded with 1 million barrels of crude called the United Leadership has spent the last three weeks at sea after it left the Turkish port of Ceyhan on May 22. Since Moroccan authorities ordered it to leave the country’s waters when it tried to dock there on June 6, the tanker has remained in the Atlantic. According to shipping data, the tanker as of Friday was about 60 miles off the coast of Casablanca in international waters.
A second Kurdish tanker loaded with another 1 million barrels of crude is also still at sea after leaving Turkey on June 9. According to Internet shipping data, the tanker, called the United Emblem, was heading west across the Mediterranean Sea and as of Friday was less than 15 miles off the coast of Malta.
The Kurdish Regional Government initially said that oil would be sold to German and Italian refiners, but last week the Italian Industry Ministry warned the country’s oil traders not to buy Kurdish crude, lest they face legal penalties. And there’s no sign that Germany wants any part of Kurdish crude. So it seems the world is siding with the Iraqi government in Baghdad, which has insisted that it’s illegal for the KRG to sell its oil without sharing the revenue with the central government.
This reluctance to take Kurdish oil could be an overhang from the stiff penalties the U.S. Justice Department is seeking to impose against French bank BNP Paribas for allegedly violating international sanctions by doing deals with Sudan and Iran. It has been reported that some of those deals with Sudan involve the bank facilitating the sale of crude oil in U.S. dollars, a clear violation of sanctions against the country. The U.S. could impose fines up to $10 billion.
While Iraqi oil production remains largely uneffected, this recent violence has totally scrubbed the country’s plans to pump more oil in the future and effectively locked the country’s capability at current levels. Iraq was hoping to grow its oil production by several million barrels over the next decade by developing fields in the north. The inability to do that could have big consequences for oil prices in the years ahead.
As Seth Kleinman, head of energy strategy at Citigroup, told Bloomberg TV this morning, “The world needs Iraqi oil. It needs Iraq not to descend into civil war.” The 2.5 million barrels of oil Iraq currently exports from the south pretty much equals the entire world’s spare capacity. Cut that out, and the world’s oil markets suddenly tighten up significantly. This also has huge ramifications for OPEC, which was hoping to grow its production by several million barrels a day by 2035, largely on the back of production gains from Iraq.
For the week, oil prices notched some of the biggest gains in recent memory. Brent prices are up 4.6 percent since June 4. That’s a big move, but still not huge given the potential for disaster in Iraq. Oil markets still seem relatively optimistic that Iraq’s production will be able to weather the violence. If not, the consequences could be enormous. As Kleinman says, it’s hard to put a value on an event with low probability but a high impact.