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Iraq and Oil: The ISIS Factor

 3 min read / 

Iraq has been destabilised by the incursion of a violent Sunni militant group known as the Islamic State of Iraq and Syria (ISIS). The group have launched an offensive in Northern Iraq, and already control Iraq’s second largest city, Mosul.

With a large endowment of natural resources, the potential risk of disruption to Iraqi production is huge; on an international level, this is made even more significant, as the country (in 2012) was the world’s eighth largest producer of total petroleum liquids, and possesses the world’s fifth largest proven petroleum reserves. As of April 2014, Iraq was reported to be producing an estimated 3.3 million barrels per day, making up 4% of the world’s oil supply. Of the 3.3 million barrels produced each day, 75% come from the south, and the rest from northern and central regions.

In order for ISIS to finance their ambitions, they will be looking to advance into oil rich areas. The group are already reported to be earning up to US$1 million per day off the sale of Iraqi crude oil, at a rate of US$30 per barrel (which is significantly below the market price); the recent capture of Ain Zalah has also enabled them to prepare an offensive launch on the Kirkuk oil field, one of Iraq’s largest.

Given the international sanctions against Iran, and the instability in Libya, there is currently little excess global oil production, and thus no cushion to prop the market in the event that Iraq’s oil exports are cut off. If Iraq’s production were to stop, rising oil prices would likely slow global growth and hurt energy consumption, ceteris paribus. In the short term, Iraq’s oil industry will be largely unaffected as the country’s top producing oil fields, and export infrastructure, are located in southern Iraq, far away from ISIS-controlled areas. There has therefore been little interference, and Iraq has been able to maintain a ‘business-as-usual’ environment, since the country exports the majority of its crude oil through the Basrah Oil Terminal, amongst others. Furthermore, ISIS has little control over current infrastructure – something that will not change unless they take control of the Kirkuk oil field. As a Shiite dominated area, such oilfields have an added layer of protection, but a layer that can only hold for so long.

In the long-term, Iraq is expected to account for roughly 60% of the growth in OPEC’s production capacity until 2019, and the threat of disruption may stem the country’s ability to meet such targets. Currently starved of the investment, infrastructure and human capital needed to achieve these goals, Iraq’s economic growth will be extremely vulnerable to any supply shocks. While no one can predict how the conflict will end, the possibility remains that Iraq’s production and export capacity will halt or slow. This is troubling for world markets, and could potentially lead to a long-term increase in oil price, which would impair the global economy. Whilst these effects will not be felt for years to come, the implications of such outcomes are harrowing; in any case, if the current situation worsens, Iraq’s top export destinations will start to seek alternatives – setting the stage for further demise.

Sources:

http://www.forbes.com/sites/fidelity/2014/10/14/isis-iraq-and-oil-prices-what-investors-should-know/

http://edition.cnn.com/2014/09/22/business/isis-oil-luay-al-khatteeb/

http://energyinasiablog.com/2014/08/isis-impact-on-iraqs-oil-industry/

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