Iraq’s production surged to a record of about 4 million barrels a day in early 2015, restoring exports to levels not seen since the 1980s. The main fields are in the areas inhabited by the country’s majority Shiite sect, which dominates the central government. More supply is also coming from the region controlled by Kurdish troops since they repelled an Islamic State offensive. Iraq’s government and Kurdish authorities reached an agreement in December on exports from the semi-autonomous Kurdish region through Turkey, a step toward settling years of disagreements that hindered joint efforts to push back the militants. The extremists captured a handful of oilfields when they declared a self-styled caliphate over a swath of Syria and Iraq, and at one point were estimated to be earning $2 million a day from illicit production. The U.S. says airstrikes have crippled their ability to refine and sell oil. While the violence initially spurred companies including BP and Exxon Mobil to evacuate workers, no major company has pulled out of Iraq. Now the low oil price may prove an even bigger threat, as plans for billions of dollars of investment in wells, oil terminals, pipelines and refineries must be reconsidered.
The price of oil leapt about 50 percent in the six months before the U.S. invaded Iraq in 2003. In 2014, by contrast, the price of Brent crude climbed just 6 percent in the two weeks after the fall of Mosul, Iraq’s second-biggest city. The chaos in Iraq comes at a time when the world is awash with oil: The U.S. boom in extracting energy from shale has made it the world’s biggest producer of oil and natural gas liquids, while OPEC nations, including Saudi Arabia, refused to cut output to support prices. That’s overshadowing concern about the security of Iraq’s fields, even as Iran’s exports are curbed by sanctions and Libya’s output is crippled by internal feuding. Iraq started pumping crude almost a century ago and now provides about 4 percent of global production. Royal Dutch Shell, China National Petroleum and other companies piled in to Iraq after the fall of Saddam Hussein to help develop its abundant oilfields after decades of war and neglect. The country holds the fifth-largest reserves and its oil is among the cheapest in the world to develop and produce.
Instability in Iraq will slow development of the country’s oil fields, and the International Energy Agency has scaled back forecasts for how fast it can add new production. Longer term, though, the world will be increasingly reliant on Iraq’s output, which is still expected to double by 2040. There’s an emerging debate about how much investment will be deterred by the fighting, leaving oil-market watchers monitoring maps of the war zones and considering whether Iraq could still deliver an oil shock. With the bulk of Iraq’s economy and government budget coming from oil, the revenue lost from the slide in prices hinders the country’s ability to both fight the rebels and to keep its oil flowing.