News Column

Why Iraq turmoil won't hurt oil prices yet

July 6, 2014

By Jennifer Collins,, Gilgamesh Nabeel and Ammar Al Shamary, Special for USA TODAY

Iraq is one of the world's top oil exporters, so you would think that a recent attack by militants on its largest oil refinery amid a deteriorating security situation in the country would prompt global fears of oil shortages and spark a spike in prices.

Instead, prices are about where they were a year ago, although they have been creeping up in recent months. Why no panic? Iraq's vast crude supplies are safe for the time being because the bulk of its oil production -- about 2.5 million barrels a day -- takes place in the south, far from the current insurgency, analysts say.

"Iraq oil production is spread throughout the country," said Richard Mallinson, a geopolitical analyst in London. "Only about 10%-15% takes place in the northern part of the country, which is where the current Sunni insurgency is being fought out."

A Sunni militant group -- the Islamic State, formerly known as the Islamic State of Iraq and the Levant -- is battling the Shiite-dominated central government. The rebels claimed late last month to have seized control of the Baiji oil refinery, but the government said it had retaken control of it.

Benchmark West Texas crude oil closed at a 10-month high of $107 on June 20. By Thursday, it had dipped to $104 a barrel, a sixth-straight daily drop. Still, global markets remain jittery about what the future could hold, should Iraq's sectarian and regional tensions worsen.

The insurgency is not expected to reach Iraq's main oil-producing fields in the south and in Kurdish-controlled areas in the north any time soon, but in the long term, "infrastructure, as well as producing assets, will be a tempting target if the (Islamic State) offensive moves into higher gear," wrote Raad Alkadiri, managing director at IHS Energy, a London-based consulting firm, in an analysis e-mailed to USA TODAY.

Any new supply outages could push global oil prices higher -- perhaps toward $120 a barrel, Alkadiri wrote. The situation has global leaders worried because the country -- along with the USA -- was expected to be one of the major growth areas for oil production, as global demand increases in an already tight market with little spare capacity, analysts say.

"If Iraq can't deliver on that, then the market looks a lot tighter," Mallinson said. "If there are disruptions to Iraq in the short term, it's Saudi Arabia that will increase its production to balance the supply and make up for the difference."

But instability, a weak government and redirected resources could block investment needed to develop Iraq's oil production in the long term, meaning it may get harder to deal with future disruptions and meet growing demand, Mallinson adds. International companies are already removing staff and preparing to move everyone out at quick notice.

"That points to higher oil prices in the medium-term," Mallinson said. Iraq's capacity to rally its troops could also affect the central government's plans to control exports from the semi-autonomous, oil-producing region of Kurdistan. The Kurdistan Regional Government has been pushing for more political autonomy and more control of oil produced in the northern region.

Despite objections from Baghdad, the Kurdish government plans to export oil directly to Turkey, the only way it believes it can get a fair share of the country's oil wealth.

Baghdad has said it will cooperate with Kurdistan's security force, the Peshmerga, to combat the Islamic State, but analysts say the Kurds are using the crisis to extend political and economic control.

"What's happened is the Kurds appear to be taking every opportunity they can amid the crisis to push for the autonomous sales and for greater control," Mallinson said. "Their forces have occupied the city of Kirkuk, which includes major oil fields, and they are trying to take control of that. And they've made it very clear, they still intend to export their oil without Baghdad's approval."

Contributing: Gary Strauss

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Source: USA Today

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