Iraq’s flood of ‘cheap oil’ could rock world markets
First of two parts.
The U.S. is not the only nation experiencing a renaissance in oil production.
Sidelined for two decades by war, sanctions and political instability, Iraq passed a critical milestone last year by producing 3 million barrels a day of crude oil for the first time since 1990, before the Persian Gulf War, reaching 3.4 million barrels a day by December. Given its access to vast reserves at low costs, Baghdad is poised to play a pivotal role in determining whether the world’s growing thirst for oil drives up fuel prices to debilitating levels in coming years.
“Iraq has a potential as a game-changer” in the volatile global oil market, said Maria van der Hoeven, executive director of the Paris-based International Energy Agency (IEA). Already, she noted, Iraq has moved up to be the world’s third-largest oil exporter and is now on a path to be much more, becoming a “strategic source of world oil supply” in the years ahead. Iraq even has hopes of supplanting Saudi Arabia as the globe’s biggest oil producer.
Iraq is perhaps the only country left in the world that has huge stores of what insiders call “cheap oil” — untapped reserves that can be extracted through relatively inexpensive, traditional drilling techniques rather than having to employ costly technologies such as hydraulic fracturing and deep-sea exploration — as in the U.S. — to tap reserves of oil found offshore or in deep underground shale formations.
The boon of cheap oil is the ironic result of Iraq’s many years outside the economic mainstream, when ongoing wars and an international oil embargo enforced by the United Nations ensured that the nation’s oil treasures were left mostly untouched in the ground.
The gusher of oil starting to flow from Iraqi wells couldn’t come at a better time. Demand for oil is escalating in quickly emerging markets such as China and India, where the use of cars is surging, and other major oil exporters such as Russia and Saudi Arabia appear to be reaching limits of their abilities to ratchet up production in major ways.
In fact, the IEA is projecting that most of Iraq’s oil production — which Iraq’s leaders hope will top Saudi Arabia’s 11 million barrels a day at 13.5 million barrels eventually — will be funneled to China and other expanding Asian markets rather than its traditional markets in the U.S. and Europe, filling a critical gap in world oil supplies that should alleviate pressure on prices in the years ahead.
Even using conservative estimates, the IEA expects Iraq to more than double its current production to 6.1 million barrels a day by 2020 and 8.3 million by 2030, enabling the country to supply 45 percent of the increase in global oil demand by 2035. Within two decades, IEA analysts expect Iraq to surpass Russia to become the second-largest oil exporter.
Iraq is coming back on the scene just when demand for oil was poised to surge in a way that threatens to drive up oil and gasoline prices to destabilizing levels. The world got a glimpse of what surging demand in emerging markets can do to oil prices when the price of premium crude shot up to an unprecedented $145 a barrel in July 2008 — the last time the world economy was experiencing robust growth. Economists say the 2008 spike in oil prices played a role in sending the U.S. economy into recession even before the global financial crisis hit months later.
The global economy has been too weak since 2008 to stoke such high prices, with demand for oil in the U.S., Europe and Japan — still the biggest consuming blocs — stable or in decline. Still, even in a weak economy, premium crude on the London exchange has been trading well above $100 for several years.
The IEA said Iraq will need to boost production to prevent another destabilizing spike in prices the next time the world economy is firing on all cylinders. It estimates that if things go well and Iraq is able to make the hefty $530 billion of investments needed to triple production in coming years, world oil prices still will rise gradually to $215 a barrel by 2030 because of fast-growing demand in emerging countries.
But it could be much worse. Should Iraq fail to realize its potential, the world could face a future punctuated by oil crises, with prices skyrocketing as new sources of supply are unable to keep up with robustly growing demand.
“Success is not assured, and failure to achieve the anticipated increase in Iraq’s oil supply would put global oil markets on course for troubled waters,” said Fatih Birol, the agency’s chief economist, adding that the “health of the global economy” is at stake.
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