Skip to main content

The Globe and Mail

Iraq insurgency could redraw region’s oil map

The speed at which an army of thugs and brigands has taken over the cities of northern Iraq is astonishing. For many Iraqis, the future looks like a terrifying downward spiral into a world of random violence, feudal justice and persecution. For the rest of the world, the sweeping victory of an Al-Qaeda splinter group over government forces armed to the teeth with American weaponry, not only raises questions about Iraq's future as a major oil producer but asks us to reassess what role the Arab states can claim as reliable energy suppliers.

It is difficult to disagree with the curt judgment of Sergey Lavrov, the Russian Foreign Minister, that the sweeping victory of ISIS, the self-styled army of the Islamic State in Iraq and the Levant, illustrates the complete failure of the U.S. and British military and political adventure in Iraq. According to reports from the region, the ISIS troops have not only looted the banks in Mosul, Iraq's second largest city, but have been busy uncovering hoards of buried American weapons as well as seizing helicopters and guns abandoned by fleeing Iraqi police and soldiers.

Having seized Tikrit and already in control of Fallujah, ISIS are now within an hour's drive of Baghdad. There, Prime Minister Nouri Al-Maliki finds himself abandoned by the Sunni section of the population, who resented what they regarded as Shia rule. He is now reported to be urging Shia militias to rally to his cause and defend the capital against the advance of the ISIS jihadists. We have all the makings of a tribal war between Sunni and Shiite. The dreadful question that must therefore be surfacing among intelligence and security officers in Washington is whether further military gains by ISIS in Baghdad might prompt Iran to come to the aid of the Iraqi Shia population. The other question being asked in Washington will be what political price Teheran will demand in return for keeping out of a civil war in Iraq.

Story continues below advertisement

For the time being, the oil fields of southern Iraq, producing some 3.2 million daily barrels, remain untouched. These drain into a pipeline system that leads to the port of Basra, the only functioning export route. But the oil markets were still betting yesterday that Iraq's oil exports would not be threatened and the price of Brent gained only $2 (U.S.) per barrel to $112.

That optimism is understandable, given the extraordinary gains in U.S. crude production that so far have filled the gaps left by the Arab Spring and the loss of almost all of Libya's oil output. However, Iraq's output is twice that of Libya's capacity. Any serious threat to those exports would have a dramatic impact on the crude oil price as there is not enough spare capacity in the OPEC system to replace Iraq's output.

The only substantial resistance to the ISIS occupation of northern Iraq has come from the Peshmerga, the army of the Kurdish Regional Government (KRG). The Kurds were triumphant today in taking control of Kirkuk, a town which is an oil pipeline hub and sits astride the Kirkuk oil field, the oldest oil field in Iraq but which is currently not exporting crude due to frequent attacks on its export pipeline to Turkey. However, hopes of co-operation between Baghdad and the the Kurdish government in Erbil in defeating ISIS seem unlikely. Instead, it is possible that the KRG will seek to use the opportunity to reinforce the independence of the Kurdish region of Iraq.

The Iraqi government in Baghdad has sought to block attempts by the KRG to sell oil independently from the Iraqi state system, but in recent weeks, production from new oil fields in the Kurdish region has been finding its way to ports in Turkey. Last week, Rosneft, the Russian state oil company, bought the first cargo of Kurdish crude oil exported through a new pipeline that connects with the main northern Iraqi export route to Ceyhan in Turkey. It was yet another signal from Erbil that Kurdish willingness to continue to co-operate with the chaotic administration in Baghdad hangs by a thread.

The outlook for Iraq has not changed since the violent unrest that followed the fall of Saddam Hussein. Dismemberment into separate Kurdish, Sunni and Shia states then seemed likely and we may now be seeing the final act of violent division. If it happens, it will be ugly, and so will the repercussions for the global economy.

Report an error Licensing Options
About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨