Published on June 28th, 2016 | by Derek Davison1
Oil Uncertainty Threatens Iraq’s Ability to Rebuild
by Derek Davison
The global oil market is undeniably in flux. Crude oil prices, after dropping at the start of this year to levels not seen in more than a decade, have climbed nearly $20 per barrel, back into the $40-$50 range, over the past two months. But as The New York Times wrote earlier this month, oil executives believe that “it will be years before oil returns to $90 or $100 a barrel.” That’s the price oil fluctuated around for most of the 2010s, before beginning a steep drop in the latter part of 2014, and, crucially, it’s believed to be the price range that most OPEC member states require in order to balance their budgets.
Uncertainty continues to attend the oil market even though prices have rebounded somewhat from their sub-$30 lows of January and February. The combination of low oil prices, environmental stresses, and government mismanagement has trapped Venezuela, the country with the largest known oil reserves in the world, in a brutal cycle whereby it can’t even keep investing the minimum amount required to maintain current levels of oil production, with cuts in production then leading to decreased revenue, forcing more cuts. Last week’s “Brexit” vote, which led to a rapid rise in the dollar’s strength and injected tremendous uncertainty into the global economic system, has already caused oil prices to dip. And, of course, the ever-present turmoil in the Middle East, affecting major oil producers like Libya and Iraq and smaller producers like Syria and Yemen, also continues to contribute to the oil price roller coaster.
A Tale of Three Oil Economies
Looking to the Persian Gulf, we can see how three of the world’s largest oil producing nations—Iraq, Iran, and Saudi Arabia—are both contributing and reacting to oil instability. Iran, barely removed from international sanctions that were lifted as part of the Iranian nuclear deal, has been trying to quickly bring its oil production back up to pre-sanctions levels. But after a promising May increase, its June production figures already show a significant decline. Iran has struggled to increase its presence in the European and African markets, but its efforts to increase its oil production capacity have been hampered by difficulties attracting foreign investment, difficulties that only recently seem to be diminishing.
Part of this struggle has been due to lingering uncertainty about the continuation of some U.S. and European sanctions. There is uncertainty as well about the nuclear deal and its ability to weather political changes in Washington (with a new president taking office next year) and potentially in Tehran (Hassan Rouhani stands for re-election next year, and Supreme Leader Ayatollah Ali Khamenei is aging and rumored to be in poor health). But much of the problem has been that, as Center for a New American Security fellow Elizabeth Rosenberg told an audience at the Wilson Center last week, “frankly [Iran] is just not the easiest place to do business”:
The World Bank’s “Ease of Doing Business” Index ranks Iran relatively low. The IMF has poured a lot of cold water on Iran’s banking system by calling out a variety of specific concerns related to it. Also, the Financial Action Task Force—the global standard-setting body and gold standard for anti-money laundering and terrorist financing policies—has Iran, along with North Korea, in a class of their own as financial jurisdictions that have egregious problems, and with which anyone seeking to do business must exercise extreme due diligence and caution, or even avoid them. There’s another series of global financial standards related to tax, accounting, financial disclosure and the like which Iran is out of step with. And, concerns about corruption…there are a variety of concerns and difficulties with anyone seeking to do business in the jurisdiction.
In Saudi Arabia, by far the biggest oil producer of the three, Deputy Crown Prince Muhammad bin Salman (MBS), who may well be the true heir apparent to King Salman, recently unveiled his Vision 2030 plan, a package of reforms and investments intended to reduce the kingdom’s overwhelming dependence on oil revenue. The oil price drop forced Riyadh to post a whopping (for Saudi Arabia, at least) $98 billion deficit last year, which caused the kingdom to cut its 2016 budget by nearly 15 percent. Those cuts have led to employment struggles for Saudi Arabia’s large under-30 population, an ominous sign of potential political turmoil. One of the centerpieces of the Vision 2030 plan is a proposal to privatize a small portion of Saudi Aramco, the oil giant worth “trillions of dollars.” The revenue gained from that IPO would help the kingdom bridge its budget gap while also generating funds that can be invested in manufacturing and alternative energy resources.
The situation in Iraq, in contrast to both Iran and Saudi Arabia, is far more critical. The drop in oil prices threatens the government’s continued ability hold the country together and, in particular, its ability to successfully recover from its war against the Islamic State (ISIS or IS).
Iraq: Struggling to Make Ends Meet
By one metric, 2015 was a very good year for the Iraqi oil industry. Apart from the United States and its fracking boom, Iraq accounted for a larger share of last year’s increase in global oil production than any other nation, and Iraqi oil exports have continued to increase this year. But because of low oil prices, Iraq’s oil revenue has been inadequate even to meet its regular budgetary demands, let alone the huge financial demands levied by the war against IS.
Those low revenues have intensified Iraq’s most serious challenge apart from IS, its political crises. The loss of oil revenue has left the government of Prime Minister Haider al-Abadi unable to meet basic civil needs and has helped spur popular Shi‘a anger at what they perceive to be Baghdad’s incompetence and corruption. Low oil revenues have also increased tensions between Baghdad and the Kurdistan Regional Government (KRG) in Irbil, as both have had to scramble for their piece of a shrinking pie.
Thanks to low revenues and those political crises, Iraq, like Venezuela, may be entering a cycle in which it can’t even maintain current production levels, a possibility that threatens to upend even the piecemeal arrangements made between Abadi’s government and the KRG. At the Wilson Center, David Goldwyn, the president of Goldwyn Global Strategies, LLC, argued that “Iraq has peaked in terms of oil production, and we will start to see declines in production and declines in exports as well.” And although the war against IS made progress this week when Baghdad declared victory in its campaign to liberate Fallujah, the underlying tension between Iraq’s Shi‘a majority and its Sunni Arab minority continues to feed IS, helping to destabilize Iraq’s oil production. It is also in turn exacerbated by the lack of revenues, as Iraq finds itself unable to rebuild shattered Sunni cities like Ramadi once they’ve been liberated.
Photo: Iraq’s Khor Al Amaya oil terminal
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