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Violence in Iraq Could Raise the Price at the Pumps

Jun 12, 2014

It's not surprising that oil prices are at a three-month high, given the alarming unrest in Iraq. Oil traders do not react well to geopolitical instability, and that goes double when there's an impending civil war in one of the world's biggest producers of crude.

The Sunni insurgents of the Islamic State of Iraq and Syria (ISIS) overran the northern Iraqi city of Tikrit, which hosts a 300,000-barrel per day refinery, while Kurdish forces are now in control of the oil-rich city of Kirkuk after Iraqi troops abandoned their post. Repairs to the 250,000 barrel a day pipeline that runs from Kirkuk to the Turkish city of Ceyhan, offline since March due to sabotage, have been interrupted because of the fighting.

The good news, of sorts, is that Iraq's biggest oil fields are in the far south, well away from the fighting in the north, as Robert McNally of the Rapidian Group told the Washington Post:

While not beyond [ISIS'] geographical reach, an effort to expand operations into southern Iraq would risk overextension and expose the militants to the more determined defenders of southern oil infrastructure as well as Shia militia.

It's possible that the Iraqi government in Baghdad—potentially with American help—will beat back ISIS and retake the north. And crude will keep pumping in the south even if the war drags on. The international oil companies that have come to do business with Iraq in the wake of the U.S. invasion are used to working in unstable places. If a civil conflict could stop the global oil industry, we'd have reached peak oil a long time ago.

But even if Iraq doesn't collapse, the unrest will take a long-term toll on the country's ability to produce oil—and that toll will be felt by consumers in the future. Iraq has the world's fifth-largest proven oil reserves, which means the country has a lot more crude left to pump. And because Iraq's oil industry was artificially depressed by years of mismanagement under Saddam, international sanctions in the 1990s and the chaos of war and reconstruction, the country has a lot of room left to improve. In February, Iraq's production hit an average of 3.6 million barrels a day—the highest level since Saddam seized power in 1979. And a 2012 report from the International Energy Agency (IEA) projected that Iraq could reach 8.3 million barrels a day of production by 2035. That would make Iraq by far the largest contributor to new oil growth, which in turn could help accommodate the still growing demand from developing nations like China.

But that sort of expansion would require tremendous amounts of investment and a steady hand from the central government. Prolonged civil war would imperil both. And if that leads to consistently higher oil prices, the global economy could be at risk too.

Members of the Iraqi Special Operations Forces take their positions during clashes with the al Qaeda-linked Islamic State of Iraq and the Syria (ISIS) in the city of Ramadi, June 19.
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Members of the Iraqi Special Operations Forces take their positions during clashes with the al Qaeda-linked Islamic State of Iraq and the Syria (ISIS) in the city of Ramadi, June 19.Reuters
Members of the Iraqi Special Operations Forces take their positions during clashes with the al Qaeda-linked Islamic State of Iraq and the Syria (ISIS) in the city of Ramadi, June 19.
A satellite image shows smoke rising from the Baiji refinery near Tikrit, Iraq, June 18.
Al-Qaeda inspired militants stand with captured Iraqi Army Humvee at a checkpoint belonging to Iraqi Army outside Baiji refinery some 155 miles north of Baghdad, June 19.
Mehdi Army fighters loyal to Shiite cleric Moqtada al-Sadr march during a military-style training in the holy city of Najaf, June 17.
Newly-recruited Iraqi volunteers, wearing police forces uniforms, take part in a training session on June 17 in the central Shiite city of Karbala.
Personnel from the Kurdish security forces detain a man suspected of being a militant belonging to the al Qaeda-linked Islamic State in Iraq and Syria (ISIS) in the outskirts of Kirkuk June 16.
Shiite tribal fighters raise their weapons and chant slogans against the al-Qaida-inspired Islamic State of Iraq and Syria (ISIS) in Basra, June 16.
Demonstrators chant pro-al-Qaida-inspired Islamic State of Iraq and Syria (ISIS) as they carry al-Qaida flags in front of the provincial government headquarters in Mosul, June 16.
Iraqi security forces fire artillery during clashes with Sunni militant group Islamic State of Iraq and Syria (ISIS) in Jurf al-Sakhar June 14.
An Iraqi security forces member with his weapon takes position as people, who fled from the violence in Mosul, arrive in their vehicles at a camp for internally displaced people on the outskirts of Erbil in Iraq's Kurdistan region June 14.
People hold posters showing Iran's spiritual leaders Ayatollah Khomeini, while Iraqi Shiite fighters deploy with their weapons in Basra, Iraq's second-largest city, 340 southeast of Baghdad, June 14.
Iraqi Shiite men, some of them wearing military fatigues and guns given by the government, raise their weapons as they gather in the Iraqi town of Jdaideh in the Diyala province on June 14, to show their support for the call to arms by Shiite cleric Grand Ayatollah Ali al-Sistani.
Iraqi men board military trucks to join the Iraqi army at the main recruiting center in Baghdad on June 14, after authorities urged Iraqis to help battle insurgents.
Peshmerga military direct traffic at a Kurdish check point on June 14, in Kalak.
Traffic from Mosul queues at a Kurdish Check point on June 14,in Kalak.
Iraqi women gather at a temporary camp set up to shelter civilians fleeing violence in northern Nineveh province in Aski Kalak, 25 miles west of Erbil, on June 13.
Iraqi children carry water to their tent at a temporary displacement camp set up next to a Kurdish checkpoint on June 13 in Kalak.
A Shiite man cleans weapons as he gets ready to defend his Sadr City district in case of an attack by Sunni extremists, on June 13 in Baghdad.
An Iraqi soldier bodychecks men as they arrive to volunteer to join the fight against a major offensive by jihadists in northern Iraq on June 13, 2014, at recruiting center in the capital Baghdad.
Iraqi policemen dig trenches at checkpoint in the Iraqi town of Taji, at the entrance of Baghdad, on June 13, 2014, as security forces are bolstering defenses in the capital.
Men chant slogans against the al-Qaida breakaway group Islamic State of Iraq and Greater Syria (ISIS), outside of the main army recruiting center to volunteer for military service in Baghdad, June 12, 2014.
An Iraq army vehicle is seen burned by militants in Mosul, on June 12, 2014.
Refugees fleeing from Mosul head to the semi-autonomous northern Kurdish region in Erbil, north of Baghdad, June 12, 2014.
Families fleeing the violence in the Iraqi city of Mosul arrive at a checkpoint on the outskirts of Erbil, in Iraq's Kurdistan region June 12, 2014.
Fighters of the Islamic State of Iraq and Syria (ISIS) stand guard at a checkpoint in the northern Iraq city of Mosul, June 11, 2014.
Civilian children stand next to a burnt vehicle during clashes between Iraqi security forces and al Qaeda-linked Islamic State in Iraq and the Levant (ISIL) in the northern Iraq city of Mosul
Members of the Iraqi Special Operations Forces take their positions during clashes with the al Qaeda-linked Islamic Stat
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