Chaos in one of the world’s biggest oil producers should push global crude prices higher, right? That’s just common sense. Common sense can be wrong. The oil market didn’t seem to care much when a radical Islamist militia seized control of west-central Iraq in June 2014. Iraq is the fourth-biggest supplier to world markets and is forecast to be one of the biggest sources of new production over the next several decades. About 90 percent of Iraq’s output is in the southern part of the country, far from the fighting. Pumping continued and even rose to a record pace, exacerbating a global supply glut that triggered a collapse in oil prices in late 2014 . The price drop in the face of bedlam in Iraq says a lot about how much the oil trade has changed in recent years. It also raises questions about whether bountiful global energy supplies have made the market alarmingly numb to geopolitical risk.
Iraq’s production surged to a record of about 4 million barrels a day in early 2015, restoring exports to levels not seen since the 1980s. The main fields are in the areas inhabited by the country’s majority Shiite sect, which dominates the central government. More supply is also coming from the region controlled by Kurdish troops since they repelled an Islamic State offensive. Iraq’s government and Kurdish authorities reached an agreement in December on exports from the semi-autonomous Kurdish region through Turkey, a step toward settling years of disagreements that hindered joint efforts to push back the militants. The extremists captured a handful of oilfields when they declared a self-styled caliphate over a swath of Syria and Iraq, and at one point were estimated to be earning $2 million a day from illicit production. The U.S. says airstrikes have crippled their ability to refine and sell oil. While the violence initially spurred companies including BP and Exxon Mobil to evacuate workers, no major company has pulled out of Iraq. Now the low oil price may prove an even bigger threat, as plans for billions of dollars of investment in wells, oil terminals, pipelines and refineries must be reconsidered.
The price of oil leapt about 50 percent in the six months before the U.S. invaded Iraq in 2003. In 2014, by contrast, the price of Brent crude climbed just 6 percent in the two weeks after the fall of Mosul, Iraq’s second-biggest city. The chaos in Iraq comes at a time when the world is awash with oil: The U.S. boom in extracting energy from shale has made it the world’s biggest producer of oil and natural gas liquids, while OPEC nations, including Saudi Arabia, refused to cut output to support prices. That’s overshadowing concern about the security of Iraq’s fields, even as Iran’s exports are curbed by sanctions and Libya’s output is crippled by internal feuding. Iraq started pumping crude almost a century ago and now provides about 4 percent of global production. Royal Dutch Shell, China National Petroleum and other companies piled in to Iraq after the fall of Saddam Hussein to help develop its abundant oilfields after decades of war and neglect. The country holds the fifth-largest reserves and its oil is among the cheapest in the world to develop and produce.
Instability in Iraq will slow development of the country’s oil fields, and the International Energy Agency has scaled back forecasts for how fast it can add new production. Longer term, though, the world will be increasingly reliant on Iraq’s output, which is still expected to double by 2040. There’s an emerging debate about how much investment will be deterred by the fighting, leaving oil-market watchers monitoring maps of the war zones and considering whether Iraq could still deliver an oil shock. With the bulk of Iraq’s economy and government budget coming from oil, the revenue lost from the slide in prices hinders the country’s ability to both fight the rebels and to keep its oil flowing.
The Reference Shelf
- An executive summary of the IEA’s annual World Energy Outlook and its oil-market report.
- Columbia University published a brief on Iraq’s oil industry.
- BP’s 2014 statistical report on world energy.
- TradeMap’s website for global trade data.
- Website for Iraq’s Ministry of Oil.
First published July 8, 2014
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Leah Harrison at email@example.com