Iraq is now facing an “existential threat”, according to US Secretary of State John Kerry. And the worsening conflict has all the potential to become a bigger threat to long-term oil prices than traders anticipate, according to Citigroup and Bank of America.

Violence in Iraq is the biggest risk to new supply this decade from the Organisation of Petroleum Exporting Countries (Opec), the International Energy Agency said on June 13. The IEA has cut its output growth outlook for Iraq by around half a million barrels to 4.29mn bpd by 2018.

The worsening Iraq imbroglio is threatening the development of some of the world’s largest oil reserves. Western majors, including BP, ExxonMobil and Shell, along with state-backed Chinese giants such as CNOOC and CNPC and Russian firm Lukoil, have invested billions of dollars in the country since 2008. But now a lightning offensive by militants from the Islamic State in Iraq and the Levant (ISIL) means the modernisation plans for Iraq’s major southern oil fields could be long delayed.

Global oil prices have risen from around $109 a barrel to nine-month highs of over $114 a barrel on the back of the crisis. Brent crude was up 57¢ yesterday at $114.69 at 1558 GMT, having fallen from a nine-month high of $115.71 last Thursday.

“In an ‘ugly’ scenario, where the bulk of Iraqi supply is lost, the price of Brent could easily surge to new record highs above $140,” Capital Economics said. Longer term, the bloodshed could hinder access to Iraq’s low cost-oil supplies, which account for 11% of proven world reserves.

Iraq’s 1mn-strong armed forces, trained by the US at an estimated cost of $25bn, wilted pathetically in the face of a lightning onslaught by ISIL (also known as ISIS - Islamic State in Iraq and Syria, an alternative English translation of its original name in Arabic). And any long-term deterioration of security could make international oil companies scale back operations, said Harry Tchilinguirian, BNP Paribas’ head of commodity markets strategy. ExxonMobil and BP have already begun evacuating some employees from projects in Iraq.

Iraq, for sure, is witnessing the beginning of devastating civil war. While the ISIL advance threatens to disrupt Iraq’s national lifeline, the conflict also poses a bigger threat of disintegrating the country along sectarian lines.

Iraqi Prime Minister Nuri al-Maliki, who is fighting for survival amid a growing revolt against his divisive polices from his own community, has blamed the recent crisis on external powers. But Sunnis, a majority in Anbar province west of Baghdad and in areas north of the capital, have long felt marginalised and excluded under al-Maliki.

No matter whether al-Maliki goes or stays, the immediate priority of any unity government in Iraq should be to address the concerns of its Shia, Sunni, and Kurdish communities alike.

Iraq has to rebuild its war-torn economy with its abundant oil riches. Political stability and peace, for sure, is a prerequisite to bring about that growth.

A stable Iraq, undoubtedly, is in the best interest of other countries in the region too.

 

 

Related Story