The Middle East is under tumult and Iraq is experiencing its latest upheaval as the Islamic State in Iraq and Greater Syria (ISIS) — also known as the Islamic State in Iraq and the Levant (ISIL) — is clamping down its hold on parts of the country and expanding its territory in others. ISIS is a former al-Qaeda offshoot that wants to redraw Middle Eastern borders while creating an extremist Islamic state, and its rise to power is destabilizing for the entire region. Neighboring Syria is already approaching failed-state status with around a fifth of the population seeking refuge in other countries. The groups is made up of Sunni insurgents, and Iran, a Shiite state, is duly concerned about the escalating violence. Oil is a major dispute in this confrontation just as it has been throughout the modern history of the Middle East.
After years of war, sanctions, and more war, Iraq’s oil production has surged in recent years and it passed Iran as the second-largest producer of crude oil in OPEC at the end of 2012. The eighth-largest producer of total petroleum in 2012 and the world’s fifth-largest proven reserves holder, Iraq may be one of the few places left where hydrocarbon resources have not yet been fully exploited, according to the EIA. Currently production is at about 3.3 million barrels of oil a day.
The recent outbreak in mayhem, including ISIS’s takeover of Mosul, Iraq’s second-largest city, sent global crude oil prices rising on speculation. However with only about ten percent of Iraq’s recent oil exports going through the northern area of the country where ISIS has established a stronghold for now, the convulsive situation is not significantly impacting production.
“Most of the oil fields in the region are around Basra between Iran and Kuwait, so they aren’t really under threat right now and I doubt they will be,” Peter Juul, a policy analyst specializing in the Middle East at American Progress, told ThinkProgress. “Unless somehow ISIS runs the table and takes over the entire country, which would lead to general chaos — but I don’t think that will happen.”
— Christopher Johnson (@chris1reuters) June 17, 2014
Foreign investment from multinational oil companies like ExxonMobil, BP, and Chevron has helped revive Iraqi oil fields that suffered poor maintenance and oversight during the Saddam Hussein era. Even if the risk of the country collapsing is still remote, those companies are doubtlessly worried over the safety of their investments and workers in the region.
“The overall scenario is making people more cautious about sending money and people in,” said Juul. “The general political atmosphere is also worrying. Prime Minister Nouri al-Maliki has not incorporated Sunnis into the government and other parts of the Shia Islamist parties don’t really like him either.”
Aside from the Shia majority in control of the government and the Sunni insurgents, there are the Kurds, an ethnic group based in a region called Kurdistan that includes a significant portion of northern Iraq. The Kirkuk oilfield, which produces some 400,000 bpd is a major hub for Iraqi energy exports. Whether the city is under the authority of the autonomous Kurdish Regional Government (KRG) or the central government in Baghdad has been a source of tension in the past, with Baghdad maintaining that oil must be exported through Iraq’s state-owned SOMO. It may be a moot point as it is currently under control of the Kurds after their security forces fried it from ISIS last week.
“It’s back to the future in a lot of ways,” said Juul. “ISIS has some oil and also the Kurds taking over, it’s ethno-national and resource pride, and it’s a big issue that’s stuck in molasses.”
If the insurgents are able to continue pressing south and take over the major oil fields or at least disrupt production, OPEC’s spare production capacity per day is about equivalent to Iraq’s 3.3 million bpd. However if oil production is disrupted, markets will get even more uncomfortable and prices will rise.
“If there is real disruption out of Iraq, we could see at least a $10 to $15 rise in pricing,” Victor Shum, a vice president at IHS Energy Insight, a consultant in Singapore, told Bloomberg. “I think if oil prices go above $120, consuming nations will discuss releasing strategic stocks.”
According to Matthew M. Reed, Vice President at Foreign Reports, a consulting firm in Washington, DC, OPEC isn’t losing sleep over Iraq just yet.
“That will change if the crisis curbs production or if the market stays anxious through this summer, when we’ll see seasonal demand rise,” he told ThinkProgress. “Saudi Arabia — the only country with reliable spare capacity — might have to decide if it wants to produce more oil then. The tighter the market gets the likelier it is we’ll see an strategic petroleum reserve release. But that’s a band-aid, not a real solution.”
Reed said that one of the biggest questions going forward is what happens to Iraq’s disputed territories. He wonders if Kirkuk will become a flashpoint of conflict between the Iraqi government, ISIS, and the KRG. If that happens it could hold the oil industry back and tears Iraq apart. The Iraqi army already abandoned oil fields to Peshmerga, the name for Kurdish fighters, and on Tuesday Iraq’s biggest oil refinery, Baiji, was shut down and its foreign staff was evacuated after ISIS jihadists surrounded it in the north-central part of the country. The Iraqi military remains in control of the facility.
“For now, ISIS and the Kurds have only skirmished off and on,” said Reed. “ISIS hasn’t made a bold play for fields or facilities in the KRG or disputed territories where we now see Peshmerga. That would be a game changer. Fields and facilities in the south are safe for now but one bombing could send shockwaves through the market. It might also invite more attacks.”
As far as the U.S. is concerned, the 341,000 or so bpd from Iraq, representing less than four percent of the country’s total crude oil imports, isn’t driving U.S. policy. The integrity of Iraq as a country and the possibility of direct threats on U.S. soil are more pressing concerns.
“Here at home, any bump in price will be cited by those who want to drill more, drill now, and limit U.S. exposure to foreign disruptions,” said Reed. “Price doesn’t work exactly like that, of course, but it won’t stop the argument from being made.”