Iraq Oil 1433

Iraq’s Oil

By | Updated August 12, 2014

Chaos in the world’s fourth-biggest oil-exporting nation should push global oil prices sharply higher, right? That’s just common sense. Common sense can be wrong. Crude prices were lower in August than before a radical Islamist militia gained control of west-central Iraq in June. (By contrast, the price of oil leapt about 50 percent in the six months before the U.S. invaded the country in 2003.) The oil market’s calm in the face of Iraqi bedlam 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.

The Situation

Oil fell back to a nine-month low of about $105 a barrel in early August after climbing almost 6 percent in the two weeks after extremist Sunni militants seized Mosul, Iraq’s second-biggest city. It was steady even after the rebels advanced to oilfields in the north and the country’s largest dam. The price of benchmark Brent crude has remained in the same $100-to-$120 range for the past two years. While the violence spurred companies including BP and Exxon Mobil to evacuate workers, oil exports appeared little affected. In fact, Iraqi’s Oil Ministry said exports rose in July. One big reason: About 90 percent of Iraq’s oil production is in the south, far from the fighting north and west of Baghdad and in areas controlled by the country’s majority Shiite sect, which dominates the central government. Royal Dutch ShellChina National Petroleum and other companies piled in to Iraq since the fall of Saddam Hussein to help develop its abundant oilfields and rebuild the industry after decades of war and neglect. While it’s unclear how the political chaos will affect that investment, billions of dollars are earmarked for Iraq’s wells, oil terminals, pipelines and refineries. The country’s minority Kurds, who have seized the oil hub of Kirkuk, plan to independently develop their region’s reserves.

The Background

The price of oil suggests that there’s a significant cushion of global supply even if things get worse in Iraq. Saudi Arabia, the largest crude exporter, has promised to provide another 2.5 million barrels of oil per day if needed to keep prices stable. The U.S. boom in extracting energy from shale has also helped. It will make the U.S. the world’s biggest oil producer this year or next, and comes as Iran’s exports are curbed by sanctions, Libya’s output is crippled by internal feuding, and civil war in Syria breeds sectarian conflicts around the Middle East. Were it not for the additional U.S. output from fracking, oil prices might have spiked $20 or $30 higher on the violence in Iraq, according to one estimate. Iraq first started pumping crude almost a century ago and now provides 3.6 percent of global production. The country holds the fifth-largest reserves and its oil is among the cheapest in the world to develop and produce. The International Energy Agency predicts that by 2035, Iraq will more than double output to 7.9 million barrels a day, allowing it to increase production more than any other country. Its addition of new capacity — which could be the biggest of any country in history over a similar time period – comes as oil explorers venture worldwide into hard-to-reach areas under the sea and in the Arctic.

The Argument

The oil market’s indifference to the Iraqi conflict is not necessarily permanent; analysts at Citigroup and Bank of America say that oil traders have grown complacent about the dangers. The IEA said in June that the fighting highlights the risk to its forecasts for Iraq’s rising oil output. Other forecasters disagree, and say prices and options for future sales overestimate the chances of the sectarian violence disrupting supplies. Promises from Saudi Arabia to keep oil flowing have brought record-low volatility to oil markets, and a slowdown in China’s economic growth is cooling global demand. Conflicting views leave oil-market watchers monitoring maps of the war zones and debating whether Iraq could still deliver an oil shock.

The Reference Shelf

  • The IEA’s annual World Energy Outlook and its oil-market report.
  • Columbia University issued 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)

To contact the writers of this QuickTake:

Alaric Nightingale in London at anightingal1@bloomberg.net

Grant Smith in London at gsmith52@bloomberg.net

 

To contact the editor responsible for this QuickTake:

Leah Harrison Singer at lharrison@bloomberg.net