Iraqi oil wealth, the Kurds and global economics

As insurgents besiege the largest Iraqi oil refinery at Baiji, the future of Iraq as a sovereign state and the second-largest Arab oil producer in the world after Saudi Arabia, is at stake. The battle for the Baiji refinery means 300,000 barrels of Iraqi oil is offline. President Barack Obama cited global energy markets as one reason he intends to deploy 300 military advisors to Iraq.

Brent crude, US gasoline prices, Turkish fuel networks, Chinese, Russian, French and British oil concessions are all at risk if Iraq’s civil war escalates into a regional war. If the Isis attacks Iraq’s oil production and export infrastructure in Basra province, world oil markets will panic. The fracking boom means the US is less immune to an oil panic than it was during Saddam Hussein’s wars with Iran and Kuwait. However, Turkey, Japan, India, China, South Korea and Europe are not. Iraqi oil production has risen every year since 2006. The battle for Iraqi oil wealth will shape the future of world economies and politics.

President Obama’s implicit call for Nouri Al Maliki’s replacement as Iraqi minister means no new oil projects will be sanctioned until a new government of “national unity” emerges in Baghdad. This could be the last chance for Iraq’s survival as a sovereign state even if means Baghdad will be forced to recognise Kirkuk (and its oil wealth) as part of the autonomous Kurdish enclave with the right to sell Kurdish oil on the world spot market. Tribal leaders will want a share of Iraqi oil wealth since Diyala and Anbar provinces boast no oilfields.

Iraq is the second-largest oil producer in Opec, with correct production in the 3.4 MBD range. While the Anbar, Diyala and Saladin provinces in northwest/central Iraq are the epicentre of Isis violence, the bulk of Iraq’s strategic oil assets are in the Basra province, which is controlled by the Al Maliki government. The Iraqi southern terminal exports 2.5 million barrels of Basra light crude to the world. There are infrastructure, construction and capacity bottlenecks in Basra’s port, oil storage terminals and pipeline networks. If Iraq’s civil war broadens to Basra, its oil and gas infrastructure will face a strategic threat. Several major US and European oil contractors have begun to evacuate foreign staff from Iraq as mass violence escalates. I cannot see how the IEA expects Iraq to contribute 80 per cent of world production growth in the next. Iraqi production of 3.5 MBD far exceeds Saudi Arabian spare capacity, which is in the 2.5 MBD range. Iraq’s current production and growth plans are also dependent on multi-billion-dollar inward foreign direct investment flows that could be at risk if Western companies decide that Baghdad will not be able to enforce its sovereign control the entire country, let alone protect the lives and property rights of foreign. These factors all mean that the world economy is at grave risk if Iraq disintegrates as a sovereign nation. The US, Asia, the Gulf and Europe all have a stake in united Iraq, though Russia and Iran do not.

The Kurdish Peshmerga’s successful seizure of Kirkuk has raised the odds of eventual Kurdish independence. The Peshmerga, not the Iraqi amy, control Kirkuk now. Kirkuk is also an oil rich area that will help underwrite the Kurdish bid for statehood. Of course, Kirkuk will be threatened by terrorist attacks, but I doubt if it will share the fate of Mosul.

The professional, trained Kurdish Peshmerga is not Al Maliki’s conscript army — and the government in Erbil is the only success story in the Levant. Of course, the seizure of Kirkuk also raises the risk a of longer war with the Iraqi army and sectarian militias allied to Baghdad. There are Kurdish minorities in Syria, Turkey, Iran and Lebanon, not just Iraq. A Kurdish state would be a historic event in the international relations of the Middle East.

Oil will define the relationship between Baghdad and the Kurdish regional governments in Erbil and Kirkuk, where Saddam’s ethnic cleansing policies can lead to ethnic clashes. Iraqi Kurdistan $12 billion trades and oil ties to Turkey will protect it from a vengeful but weak Baghdad government. Turkish companies like Genel Energy, led by former BP chairman Tony Heyward, operate in the statelet Kurdish tankers cannot unload their cargoes in international ports due to threats of lawsuits from Baghdad. However, if Baghdad and the Kurds ally and use the Peshmerga to destroy the Isis, Iraq could avoid partition.

The last thing the world economy needs is a failed state in the world’s biggest but most violent, unstable oil province.

The writer is a Dubai-based research analyst in energy and GCC economics.