Anxiety over the turmoil in Iraq disrupting oil output is easing as Iraqi forces push back against the Sunni extremist insurgency, but long-term fears remain that the instability could cause painful aftershocks -- especially if it scares off multinational oil companies that had begun investing in the war-torn country after years of holding back.
Iraq is the sixth largest exporter of crude oil in the world and pumps out 3 million barrels a day, according to a 2013 International Energy Agency report. In 2003, when the U.S. invasion of Iraq began, the Organization of Petroleum Exporting Countries predicted that production could be ramped up to as many as six million barrels a day by 2010 and seven to eight million by 2020. Continued violence and political turbulence have prevented Iraq from reaching that potential, but foreign investments since 2012 have dramatically increased, renewing hopes that Iraq's oil production would rapidly accelerate.
“In the long term Iraq is set to become one of the main pillars of global oil output, and will also become the largest contributor to global oil export growth,” the International Energy Agency said in a report last month.
The siege of large swaths of the northern area of Iraq by the al Qaeda-inspired Islamic State of Iraq and Syria threatens to upend those goals. At least for the moment, the worst fears have subsided, now that Iraq forces appear able to prevent the ISIS advance from moving across the southern region of Iraq, which holds 90 percent of the country's oil reserves.
“If, in fact, we see a sustained situation of chaos and disarray in Iraq, if we see some prospect for a de facto partition of the country, I think that much of that growth is called into question, and that puts pressure on other oil suppliers around the world,” said Suzanne Maloney, a senior fellow at the Brookings Institution's Saban Center for Middle East Policy and an expert on Middle East energy policy.
Fears mounted when ISIS took control of the Baiji oil refinery in northern Iraq. The facility is the country's largest, producing one-third of Iraq's oil output, although most of it is used for domestic consumption. The refinery has been the focus of intense fighting in recent weeks, but the Iraqi government says it has regained control of the facility.
The vast majority of Iraq's export oil structure is clustered around Basra in the deep south, and to a lesser extent in the most northern Kurdish-controlled areas — both areas that ISIS currently does not threaten.
But the government still must worry about small attacks on oil pipelines in the southern areas, which would take only a small number of Sunni fighters to pull off.
With only about 2 million to 2.5 million barrels daily of spare crude oil capacity in the global market, energy analysts are watching the fast-moving developments in Iraq particularly closely.
“If you saw a dramatic reduction in Iraq’s exports it could quickly absorb that excess capacity and would put some significant upward pressure on oil prices,” said Colin Kahl, senior fellow at the National Security Network and the director of the Middle East Security Program at the Center for New American Security.
In fact, gasoline prices have shot up about 25 cents in the U.S. in the last several weeks because of the unrest, according to AAA auto club, although oil prices have started to ease.
“I think that the real concern is that Iraq will not meet its potential to produce even more oil in the years ahead,” Kahl said.