ISIS and the Long-Term Threat to Iraqi Oil

Islamist militants haven't touched Iraqi oil production or exports yet, but they threaten Iraq's all-important future prospects.

Photo by Dan Kitwood - Getty
Photo by Dan Kitwood - Getty

The relentless march of Islamist militants south through Iraq is taking a toll on the country’s oil infrastructure, forcing the closure of Iraq’s largest oil refinery and sparking fears of an attack on Baghdad itself.

But with Iraq’s oil output, if not its national integrity, apparently still intact, global oil markets are treading water after pushing crude prices up to nine-month highs late last week.

The real problem posed by the offensive unleashed by the Islamic State of Iraq and al-Sham (ISIS) is not what happens to Iraqi oil production this week, but whether OPEC’s second-biggest producer can meet outsized production-growth expectations for the rest of the decade. If it can’t, energy analysts say, the world’s inexorable thirst for oil could soon collide with limited growth in supply, leading to higher prices and lower economic growth in the United States and around the world.

Iraqi forces in Baghdad braced for the possible arrival of ISIS fighters on Tuesday, June 17, and the southward spread of violent insurgents forced the closure of Iraq’s biggest oil refinery and the evacuation of foreign personnel working there. The shutdown and evacuation of the Baiji refinery — prompted by fears of ISIS mortar attacks — won’t directly affect Iraqi oil output, but it does threaten domestic supplies of refined petroleum products.

So far, ISIS militants have not threatened Iraq’s giant oil fields; most of those are farther south, and oil exports are still flowing out of the country through ports far from ISIS-held territories in the north.

The relative security prevailing in the south, where exports could hit near-record levels of 2.8 million barrels a day next month, is keeping a lid on oil prices. Crude trading in New York and London held steady at about $106 and $113 a barrel, respectively, or roughly 3 percent higher than before the ISIS march began.

There is another potentially bright spot in the Iraqi oil sector: the quasi-independent Kurdish region in the north. Kurdish troops have so far stood up to ISIS and kept their territory free from insurgent attacks. And now that Kurdish forces occupy the historically contested city of Kirkuk and its significant adjacent oil fields, the Kurds are in a much better position to jump-start exports to countries such as Turkey.

In a significant oil-market report released Tuesday, the International Energy Agency (IEA) projected that Iraqi output will account for 60 percent of all OPEC production growth for the rest of the decade. "Given Iraq’s precarious political and security situation, the forecast is laden with downside risk," the report said. And it’s not just Iraq: In many OPEC nations, the IEA said, "political turmoil and security concerns are a growing impediment to supply growth, if not a cause of outright disruptions."

Iraq’s centrality to oil’s future was also underscored by Energy Aspects, a London-based energy consultancy, on Tuesday. Affordable oil "would seem to need a lot of incremental oil supply from Iraq, while all the current dynamics suggest that the flood may be just a trickle," the group said.

Even though the United States’ recent oil-production boom has helped offset oil-market struggles elsewhere, Iraq’s importance to world oil supplies will only become more crucial after 2020 because the market is counting on Iraq meeting very ambitious output targets. "It is difficult to overstate the importance of Iraq to the long term outlook for oil markets," said Securing America’s Future Energy, a group that advocates reducing U.S. dependence on oil, in a report Tuesday.

In the short term, Kurdistan will be a vital, if politically charged, part of Iraq’s efforts to juice oil production and exports. The Kurdish natural resources minister, Ashti Hawrami, said at a conference in London that the Kurdish government has linked the Kirkuk oil fields to a Kurdish export oil pipeline, raising the possibility of greater oil exports that bypass Baghdad altogether.

Although exports from the north are blocked for now — the pipeline is still damaged and border areas are under ISIS control — Kurdish officials said they hoped for 200,000 barrels a day of oil exports this summer and 400,000 barrels by the end of the year. The Kurds have already loaded oil onto a second pair of tankers for resale in Europe, he said.

That could be the region’s ticket to financial independence from Baghdad. The central government and the semiautonomous region have been fighting over how to divvy up revenue from Iraqi oil exports; Kurds say they are shortchanged by Baghdad and don’t receive their stipulated 17 percent share.

"We’re going to create facts on the ground to have my 17 percent in my own hands," Hawrami said, according to Reuters.

Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP

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