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Iraq May Be the Next Flash Point for Oil Markets

Ellen R. Wald

(Bloomberg Opinion) -- It’s now been a week since mass protests sprang up in southern Iraq, sparking unrest that has left dozens dead and continues to flare. What began as spontaneous expressions of discontent over high unemployment, government corruption and Iranian involvement in Iraqi affairs has quickly turned into a movement that could soon have severe consequences for global oil markets. This new danger comes just as supply concerns following last month’s attacks on a key Saudi Arabian facility have begun to die down.

Southern Iraq is home to most of Iraq’s oil industry and the protests have reached the city of Basra, where thousands of people took to the streets last week. The situation there is particularly volatile because that city is responsible for the majority of Iraq’s oil exports. So far, Iraqi security forces have responded to the disturbances with deadly force. Still, the protests, some of which have turned into violent riots, show no signs of abetting. In fact, given the anti-Iranian tenor the protests have taken on, the situation could get worse before it gets better as millions of Iranians prepare for an annual religious pilgrimage to Karbala, a city in southern Iraq.

Iraq’s oil industry is the lifeblood of the government and an important input in the global supply chain, so any disruptions caused by the unrest would send ripples through the broader market. The port at Basra exported 3.5 million barrels of oil per day in September, according to calculations from TankerTrackers.com, representing 90% of all of Iraq’s oil exports.  (Iraq is the second-largest oil producer within the Organization of Petroleum Exporting Countries, known as OPEC.) These exports alone generate approximately $213 million every day for Iraq, TankerTrackers estimates, without which the government wouldn’t be able to function.

Heavy oil from Iraq is particularly valuable in the current market and is an important source of crude for China, India, the Netherlands and South Korea. In the U.S., heavy oil from Iraq helps make up for the loss of heavy oil from Venezuela, which refineries in the U.S. can no longer import due to sanctions on that country. Iraq is also an important exporter of petroleum products, many of which are produced at refineries in Basra. Iraq’s role in the refined petroleum market is even more significant now, with Saudi Arabia’s ability to produce petroleum products impaired following last month’s attacks. In fact, Saudi Arabia is currently importing Iraqi petroleum products to fill voids left by the damage.

In an oil market that just lost the cushion of Saudi Arabia’s spare capacity, a disruption to Iraqi oil production for any length of time could pressure prices. Iraq isn’t Saudi Arabia, and doesn’t have workarounds and spare capacity built into its system to compensate for outages due to sabotage or strikes. Traders and market watchers should be monitoring Iraq and the developing situation there closely.

In the next two weeks, approximately 3 million Iranians are expected to travel to Karbala to commemorate the death of Hussein, an important Shi’a figure and the grandson of the Prophet Mohammed. When the protests began, Iran briefly closed two key border crossings it maintains with Iraq at Khosravi and Chazabeh, though other border crossings remain open in preparation for the event. An influx of Iranian pilgrims into Iraq could easily exacerbate an already tense situation. 

The irony is that less than two weeks ago, Saudi Arabia and Iran were seen as most likely to start an international conflagration and disrupt oil supplies. While diplomats and politicians tried to pin blame on Iran and demand a global response at the United Nations General Assembly meeting for the missile and drone attack that disrupted Saudi oil production, domestic unrest was brewing in Iraq. These protests – which have taken a decidedly anti-Iranian turn – could easily and quickly affect Iraq’s oil supply and therefore present a more serious and longer-term risk to global oil supplies than last month’s attack.

To contact the author of this story: Ellen R. Wald at ewald@tvslconsulting.com

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ellen R. Wald is president of Transversal Consulting and a nonresident senior fellow at the Atlantic Council's Global Energy Center.

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