Iraq destroys world oil balance

By Vagif Sharifov- Trend:

Strife in Iraq has in the past 25 years seriously perturbed ethe world oil markets at least twice, rocking and even shattering all forecasts.

The first and second Iraqi war demonstrated to us that it is easier and quicker to swing the price pendulum than to calm it down afterwards. For example, in July 2013 the U.S. Energy Information Administration (EIA) made a few oil price forecasts, some looking ahead to 2040. EIA believed the "high" oil price in 2014 could be as much as $122.7/bbl. of Brent, the "low" one - $84.7/bbl. EIA expected by 2040 the "high" - $237.2/bbl. and the "low" - $74.9/bbl.

Recent destabilization of the situation in Iraq, the actions of militants from the Islamic State in Iraq and the Levant (ISIL) this week led any possible oil price forecasts to a dead end.

Author of the famous book "The Prize: The Epic Quest for Oil, Money, and Power", the founder of the IHS Cambridge Energy Research Associates (IHS CERA), Daniel Yergin believes that the current crisis will have an unpredictable impact on oil prices. He thinks the map of the Middle East can be rewritten. The oil market is facing new challenges, said Mr. Yergin, who was quoted by ITAR-TASS.

BP chief executive, Robert Dudley called the current events in Iraq "terrible with far-reaching consequences for the region."

It is a well-known fact that Iraq is the second country after Saudi Arabia in terms of proven oil reserves.

As of January 1, 2014, Iraq's share in the world proven oil reserves was 8.9 percent -- 150 billion barrels. That would in theory make almost 90 out of every thousand of barrels of oil produced in the world come out of present day Iraq. Only four countries in the world are ahead of Iraq in oil reserves, namely, Venezuela (298.3 billion barrels), Saudi Arabia (265.9 billion), Canada (174.3 billion), and just slightly ahead- Iran (157 billion barrels). These are annual statistics reported by BP.

Iraq has increased daily oil production by more than two-fold - from 1.3 million barrels in 2003 to 3.1 million in 2013. On average, more oil was produced per day in 2013 than any year for the last ten years. The country's oil production share in the world was 3.7 percent as of January 1, 2014.

Iraq's refining capacity is 1.2 percent of the world capacity. The capacity reached 1.13 million barrels of oil per day in 2013. This is 1.5 times more than Iraq could process at the refinery ten years ago. However, according to the media reports, Iraq's largest oil refinery in Baiji city closed Tuesday night in connection with the actions of the Islamic State of Iraq and the Levant (ISIL) terrorist group. Its foreign staff was evacuated.

Markets always overreact to the risks that can hamper the physical supply of raw materials; here we are talking about the Basra Light oil. This type of Iraqi oil is used in setting the price for other brands of the export oil in the Gulf. Basra Light's density is 30.4 degrees API with 2.79-percent sulfur content. It is included in the export basket of OPEC.

The futures for Brent oil (for July 1, 2014) have already increased by 3 percent and hit $113.27 per barrel against the background of the situation in Iraq, according to Reuters.

Experts now worry if Iraq will retain the boundaries of the country that gained independence in 1932, asking if the country could be divided into three separate entities and what are the chances for another full scale war?

The U.S. and Iranian delegations meeting in Vienna over Iran's nuclear issue are reported to have discussed the possibility of joint action in combating the ISIL.

"We are open to cooperation with Iran, as well as with other regional powers on combating the threats imposed by the Islamic State of Iraq and the Levant (ISIL)," a spokesperson for the U.S. Department of State said.

"I can just hear Obamaites justifying an American re-entry by claiming we have a "treaty obligation" to intervene," Justin Raimondo, columnist with U.S. Antiwar.com website wrote.

"Now everything goes on the back burner against the background of the crisis in Iraq. A question arises whether Iraq will remain as a state. Confidence about the growth of Iraqi oil output is becoming a key element of stability in the world oil market. This concerns not only Iraq, but also the stability in the entire Middle East," Daniel Yergin said.

The UN Secretary General Ban Ki-moon urged Iraq's Prime Minister Nouri al-Maliki to resort to dialogue and try to stop the violence in the country.

"I hope that with the support of neighboring countries and the international community, we can help the Iraqi government first of all to restore peace and stability in the country", the UN secretary general said at a press conference in Geneva, Reuters reported.

The crisis in Iraq may affect not only the price of oil. A sharp rise in oil price, on the one hand, will slow economic recovery for the importing countries, such as Japan, and on the other hand, will stimulate the growth of the exporting countries. Notably, the World Bank lowered the forecasts for the prospects for global economic growth last week.

Although delays in the expected revival of economic activity were due to weak growth in the first quarter of 2014, presumably, there will be no preconditions this year to lower oil prices due to the geopolitical risks.

The World Bank's report on Global Economic Prospects says that the growth rate of the developing countries will be below 5 percent for three years running.

"It is expected that the production volume will increase in the region's developing countries that export oil, after the previous economic disturbances, especially in Iraq" the report said.


/Trend/