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Why turmoil in Iraq won’t create new oil crisis

The rapid military and political deterioration in Iraq highlights the frailty and incompetence of the central government in Baghdad. But it doesn't translate into a major world oil crisis, despite the latest jump in prices amid growing concerns about potential supply disruptions.

The fallout could even have a beneficial side effect: improved U.S. relations with Iran, which has signalled its willingness to join Washington in preventing a widening sectarian war. That, in turn, could prompt a further easing of restrictions on Iran's own oil exports.

Crude prices have reached their highest levels in nine months in response to the Iraqi chaos. But the global benchmark, Brent crude, is only slightly above its average of nearly $111 (U.S.) a barrel at the height of the tumultuous Arab Spring events of 2011. And it may not have much room to spike higher. Indeed, the price weakened after Baghdad deployed additional forces to guard oil fields and infrastructure.

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Before the latest bunch of Sunni insurgents began moving beyond their base in the northwest, Iraq was producing about 3.3 million barrels of oil on a good day, less than 5 per cent of global supply. The total was often lower, because of infrastructure problems, occasional attacks on pipelines and a lack of sufficient storage and port facilities.

The country's major oil fields remain beyond the militants' reach, in the relatively peaceful south, which accounts for 75 per cent of production and about 90 per cent of exports, and in the northern Kurdish region, from which a small amount of oil continues to flow through Turkey.

Shipments through the main oil port of Basra in the south are expected to average 2.6 million barrels a day for June, according to Iraq's oil ministry. And in the north, about 120,000 barrels are still moving through Turkey by truck, Turkish Energy Minister Taner Yildiz says. That's far below normal capacity, but a pipeline capable of carrying 600,000 barrels daily was damaged in a 2013 attack, and repairs have been halted by the current fighting.

Any shortfalls stemming from major cuts to Iraqi output could be replaced by the Saudis and other producers, including Iran, which is currently limited by sanctions to exports of no more than about one million barrels a day (a level it is believed to be regularly exceeding). Before the international curbs, Iran was shipping 2.5 million barrels.

The U.S. could easily cover any supply gap on its own by dipping into its vast strategic petroleum reserve. Analysts have calculated that Washington could add 500,000 barrels a day to global stocks for several years without putting a serious dent in its holdings.

But none of this may be necessary, because Washington, Tehran, Ankara and their various allies have too much at stake to stand idly by and let things spiral out of control.

At the height of the Arab Spring turmoil, some crystal-ball gazers confidently forecast that oil would shoot past $120 in 2012 and beyond. But apart from Libya and Syria, production levels in the Middle East remained steady, while U.S. output soared, thanks to the joys of fracking.

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The result was a lengthy period of relative price stability, albeit at fairly high levels. The Iraqi mess casts a shadow over that sunny picture. But the rain clouds aren't on the horizon yet.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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