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Page added on June 27, 2014

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The Peak Oil Crisis: Iraq on the Precipice

Public Policy

The daily newspapers are now full of stories predicting that Iraq, as we know it, will soon disintegrate into three or more warring states. In the last two weeks Sunni insurgents led by the extremist ISIS have routed a good part of the Iraqi army, taken over much of northern Iraq not controlled by the Kurds and now are moving close to Baghdad. Despite the dispatch of American and Iranian military advisors to at least assess the situation, most observers say government forces are too weak to drive back the insurgents and retake the lost territory. Washington is refusing to get involved unless the Shiite dominated Iraqi government makes radical changes in its relations with the Sunnis and Kurds.

Our concern here, however, is what all this has to do with the world’s oil supply and, closer to home, our gasoline prices. In recent days we have been told innumerable times that most of Iraq’s oil is way south of Baghdad where it is relatively immune from the turmoil in the north – so there is little chance that Iraq 2.5 million barrels a day (b/d) of exports will be affected. While this may true for the next few weeks or even months, the Sunni resurgence in the north is not a short term problem and in the past week the ISIS has captured some formidable assets which could bring heavy pressure on, if not strangle, Baghdad.

ISIS now has control of one of three major refineries in Iraq which supplies the motor fuel and oil for power stations for the northern part of the country. Lines are already forming at gas stations. The ISIS controls the Euphrates and will likely gain control of the Haditha power dam which supplies 360 MW to the national power grid. With control of the river dams, reduced flows of water could make life very difficult in southern Iraq before the summer is over. It is doubtful if the thousands of foreign oil workers that are expanding and overseeing Iraq’s oil production would stick around too long. Some non-essential-to-production foreigner oil workers are already leaving the country or moving to safer areas.

Another facet of last week’s developments is that the insurgent forces in Anbar province are getting very close to Baghdad’s airport. All it would take would be a few of the howitzers they captured from the Iraqi army and air travel into Baghdad could be restricted.

While it may be impossible for insurgent forces even of the fanatical variety to fight their way through thousands of Shiite militiamen to the southern Shiite shrines and oil fields, in a prolonged standoff (and this one has been going on for 1,400 years) serious harm is likely to be done to Iraq’s current and prospective oil production. Some observers are already saying that large increases in Iraqi oil production in the immediate future are unlikely, but as yet few are writing off the current 3.3 million barrels of daily oil production.

Let’s assume, however, that before this year or next is out, Iraqi oil exports drop substantially as it has in several other oil exporting states undergoing similar political trauma. Just what does this mean for the world’s oil supply?

With 2.5 million additional barrels of oil disappearing from the market added to the 3.5 million that have already been lost due to lower production in Libya, Iran, Sudan, and Nigeria, the world markets would clearly be stressed.

The Saudis could probably come up with an extra million b/d for a while, but that is about it. Iran could sign a nuclear treaty this summer and be out from under sanctions, but it will take a while to develop significant increases in production. Libya, Sudan, Syria, Nigeria and Yemen show no signs of settling their internal political problems and start exporting significantly larger amounts of crude in the foreseeable future.

Keep in mind that global demand for oil has recently been increasing at a rate of about 1.2 million b/d or so every year, while depletion of existing oilfields requires that another 3-4 million b/d be brought into production each year just to keep even.

Many people including government forecasters are looking to increasing U.S. shale oil production and more deepwater oil from the Gulf of Mexico to keep the world’s supply and demand in balance without sharp price increases. Somewhere down the line there may be more oil produced from the Arctic; from Kazakhstan; from off the coast of Brazil; from East Africa, and even significant shale oil production from other than in the U.S., but it will be many years before these new sources can start producing significant amounts of crude and none of these are likely to make up for any shortages that develop in the next few years.

Deepwater oil production from the Gulf of Mexico has been flat recently, and we are starting to get indications that the rapid increases in US shale oil production, which have kept prices under control for several years, may be drawing to a close. The geology of shale oil production dictates that once it stops growing, a rapid decline in production is likely.

In sum, it looks as if there will be higher and possibly much higher oil and gas prices coming soon. If ISIS decides that the way to finish off the Shiite “infidels” is by cutting their oil revenues, then a bombing and terror campaign against southern Iraqi oil installations and oil workers would be a likely result. It would not take much to send the foreigners running. The Chinese are already moving out some of the 10,000 oil workers they have in southern Iraq and others are likely to follow as we have seen in so many other places.

Where do oil and gas prices go? The official forecasters are only talking about another couple of dollars a barrel this year, but this is clearly too low if significant shortages develop.

FCNP



18 Comments on "The Peak Oil Crisis: Iraq on the Precipice"

  1. robertinget on Fri, 27th Jun 2014 9:17 am 

    If the US goes ahead supporting Shiite
    Iraq while at the same time helping mostly Sunni backed Rebel forces in Syria, doesn’t this send mixed messages to Saudi Arabia? Maybe, that’s part of the deal.
    In the Mideast and oil bidness, anything is possible.

    First of all… Syria’s proxy war* is now all wrapped up with Iraq’s civil conflict.
    Soon we’ll be seeing poor little Lebanon, bursting at seams with refugees, home to Hezbollah (also Syria supporting Assad) and Jordan where every fifth Jordanian is Syrian,IMPLODE.

    Iran, Iraq, Syria, and Russia opposing
    USA, KSA, UK. What could go wrong?

    Folks in Falls Church may have the answer, I certainly don’t.

  2. Davy, Hermann, MO on Fri, 27th Jun 2014 9:41 am 

    The geopolitical dynamics of the ME are centered on Iraq now. There are so many variables involved with this great game. We have the Shia/Sunni battle as front and center. We have Iran/US battle improving or dead? Russia is now making inroads into Shia Iraq. The US is stumbling yet again in Iraq or is it? Does the US dump the Sunni’s and their benefactor KSA? The US is in Jordan in strength. The US is arming Syrian rebels. All is quiet with Hezbollah and Israel but we know that is on the surface. Are the Turks and Kurds jumping into the sack? Will Chinese cut and run? Then we have a PO dynamics going on with stagnating production of the quality net energy crude worldwide with the possibility of the last remaining abundant high quality net energy crude shut in. This situation is about as complex as the geopolitical situation can be. We are not hearing diddilly squat out of the UN, IMF, and or IEA on this situation. And hey, what about all those executions on YouTube. Wow that’s some action. You can be sure ISIS will have a challenge to take over the ME region like some are saying with all these power plays. I feel personally ISIS will gain a strong hold in eastern Syria and Sunni Iraq and hold it. As time goes on they will moderate the warring along the lines of the Taliban pre-2001. The nature of revolutions are like a fire burning until the fuel is gone. There is no fuel in Shia Iraq, Jordan, and the Kurdish region. These areas will resist the flames of a populous Sunni revolt. We will basically soon be in a status quo with what we see on the ground except Baghdad. Baghdad has yet to play out with its multi ethical make up. It may have trended to a city of sectarian enclaves in a mini Balkanization but they are next door to each other in a huge metro area. What a mix and it is a hot summer if the lights and A/C go blinking more than normal.

  3. Plantagenet on Fri, 27th Jun 2014 9:48 am 

    The Shia vs Sunni war has been going on for 1400 years. Putting US troops in the middle of it is a big mistake. The Sunni and Shias won’t stop fighting just because Kerry fives a speech

  4. robertinget on Fri, 27th Jun 2014 9:52 am 

    Making oil price predictions in a rigged
    market is almost as dangerous as grabbing a flight to Turkey, deciding at the last minute which side you are going to die for.ISIS is taking all warm Shiite bodies.

    “In the Shadows of Shrines,Shiite Forces Are Preparing to Fight ISIS”. (Washington Post Headline)

    Back to oil. If market riggers can hold BELOW $129. (my figure) Perhaps—the world can get by. One thing folks in Falls Church get exactly right is a huge renewed interest in ultra deep water drilling. Every deep water rig from the Arctic to Terra del Fuego will be pressed into action.

    Just as sure as the Sun came up this morning ISIS will a) disrupt Iraqi oil
    exports, B) mess up Shiite shrines,
    C) go around Baghdad blowing pipelines
    pumping stations but NOT oil fields.

    We must wait and see if Saudi choke points escape Iranian missiles launched
    by Hezbollah militants.

    War Humor: Guy walks into market. Two
    men grab guy, put knife to belly.
    “Sunni or Shiite?” The biggest thug asks. “Neither, I’m ——–” replies guy.
    (would you want to be this guy?)

  5. Dave Thompson on Fri, 27th Jun 2014 10:15 am 

    Every drop of crude that is put on the market is bought and sold. A few million barrels this way or that way, is the difference between a faltering just barely functioning economy(as is now) and total collapse.

  6. paulo1 on Fri, 27th Jun 2014 10:23 am 

    re: “Iran could sign a nuclear treaty this summer and be out from under sanctions, but it will take a while to develop significant increases in production.”

    More likely Iran is now duped into long-term participation in both Syria and Iraq, and helping out Hezbollah). When they are committed and weakened someone will boogeyman them up again.

    By the way, what happened to North Korea endangering the world and everyone’s way of life? Oh right, they are still part of the Axis of Evil, aren’t they?

    Spin spin spin.

    Paulo

  7. Davey on Fri, 27th Jun 2014 10:44 am 

    Paulo, the way things are going in the ME we may see a North Korea/ ISIS alliance.

  8. Juan Pueblo on Fri, 27th Jun 2014 11:17 am 

    Temporarily, and even permanently, losing Iraq’s oil exports could end up being a good thing. It would likely create a recession similar to 2008, which could be a manageable step down at this time. It would also increase oil prices before the economic bust, forcing adjustments, and the bust itself would force further adjustments. Oil prices would crash during the bust and then climb back to a new, higher normal range that will allow for more investment in oil production.

  9. Davey on Fri, 27th Jun 2014 11:42 am 

    Well put Juan, and I second your comment.

  10. Plantagenet on Fri, 27th Jun 2014 3:08 pm 

    Why do you imagine that a “recession like 2008” would be a “manageable step down” this time?

    Why wouldn’t it trigger a deep global depression this time. After all, the USA, EU and much of the rest of the world are much deeper in debt now and many millions more people are unemployed and living in poverty now then there were in 2008.

  11. Davey on Fri, 27th Jun 2014 3:46 pm 

    Plant, a species collapse stress is measured by the duration and degree of the descent. Let us hope we can have a gentle and short descent until reboot. We know the ship is going down but how fast and how cold the water is we have no way of knowing. In 2008 they may have reached in that hat for a rabbit without finding any. I was amazed they pulled the 2008 stabilization off. Something else could amaze us in the next correction. Yet, the systematic disequilibrium has magnified so many times since 2008 and depletion continues like sands through an hour glass. I see ugly ahead.

  12. Plantagenet on Fri, 27th Jun 2014 6:31 pm 

    I see ugly ahead as well, Davey. Thats why I’m skeptical of suggestions that the next economic crisis will be contained and managable. AND, the war in Iraq has a good chance of triggering the next economic crisis, as ISIS is clearly targeting Iraq’s oil infrastructure which currently exports 3MM BBLS of oil each day.

  13. Makati1 on Fri, 27th Jun 2014 7:05 pm 

    Plant, I think it will be a crash next time. The Central Banks are out of ammo that actually works. The world is living on an I.V. of printed paper, not real money of value. Another world war is the only escape for the debtor countries (US, EU, Japan).

    The ME is in the process of realigning itself back to pre WW1 boundaries. Not those drawn on a map by a bunch of white guys who either had no idea what they were doing or were so puffed up with self importance that they actually believed they could play god, or both.

  14. Davy, Hermann, MO on Fri, 27th Jun 2014 7:27 pm 

    Mak describes himself without realizing it.

    “A white “guy” who either had no idea what he was doing or is so puffed up with self importance that he actually believed he could play god, or both”.

  15. Joe Clarkson on Fri, 27th Jun 2014 11:04 pm 

    Davy,

    “Mark Sykes of Britain and George-Picot France agreed upon the division of Ottoman Empire territories in 1916”. This was the basis of the current dysfunctional borders in the ME.

    Makati’s description of them as “white guys” was presumably only to point out their European hubris, of which they and their governments had plenty. I see no need to turn this description against him, especially since, while not PC, it is historically correct and equally correct as ‘shorthand’ for the class, race and cultural imperialism which was prevalent then and continues to this day.

  16. Davy, Hermann, MO on Sat, 28th Jun 2014 6:06 am 

    Joe, you have missed the Mak and Davy show. Mak comes on and dirties and soils everything and anything about the US. This includes good normal salt of the earth people. It includes all US institutions. The government and industry are routinely bashed. The reserve currency status is daily beat on. That is his the first breath. Then the slim dribbles from his mouth on the glories of the East Asia. The soon to be supremacy of the China/Russian military and trade block. He does this with little intellectual and factual support. It is just the usual old man fart smell. Mak lives in the Philippians in a high rise condo supposedly near Manila Wall Street equivalent. We are constantly told how wonderful the Philippians is in every way possible IOW an experience of nirvana. He claims to be one of the people and live like an earth friendly peasant then he spouts off about his comfortable middle class living conditions. Then Mak will talk about his very small farm and how he and 4 other family are going to survive on 10 acres. Mak thinks he has his collapse transitions under control. Collapse is coming to the west but the East will be fine. WWIII is coming with the end of the US from an EMP blast. Mak uses mainstream media to support his ideologue message when it agrees with him. When mainstream media is not in his agreement it is criticizes as a tool of the DC Mafia. On and On and On we hear slim ball Mak. Then you have Davy who obviously has a screw loose somewhere because normal people on this board just ignore the blowhard Mak and his unfair criticism. Other on this board are even nice to Mak since he has been here long. We all tend to criticize America and the US foreign policy. I have no problem with this when it is fair and balanced. This site seems to be an anti-American soap box along with PO issues. I accept this and participate in both. I am a bit obsessive and have chosen to dig at Mak any chance I get as a show of patriotism for my country and people. There are only two other numb-nuts here I beat on their call sign is Noobtube and Clueless. They are really low lives. Mak is in the same class but his message is more mainstream, camouflaged, and rambling. I admit to lacking the maturity of other on this board by just ignoring Mak’s post. I also post excessively. I know there are people on this board that feel this rambling shows lack of manners, sorry. Yet, I feel compelled to stand up for my country, my people, and myself. I am American and love my country. I criticize it for reason of improvement. If you accept you have a problem you are ready to deal with it. The Mak and Davy show could end if Mak would just balance his one sided anti American rhetoric but no chance of that. Mak is the type of scum that can’t admit to his own problems so he blames other.

  17. Makati1 on Sat, 28th Jun 2014 10:22 pm 

    Joe, Davy likes to resort to name calling when he cannot defend the USSA with facts. I’m a 14th generation American. I loved my country up until the last few decades. Mostly because I had no idea what my country was really doing to the rest of the world. Now I understand and no longer have any patriotic feeling for it.

    There are some good people there, but they have swallowed so much of the BS cool aid that they are lost. They support the plundering and killing of their country. Therefore they are no better than the DC Mafia they support. I do not hate the US, I feel sorry for the people in it. They have no idea what is coming and their government doesn’t want them to know or prepare.

    Yes, I support the Philippines and think I made the correct choice to relocate here. True, I still live a somewhat middle class life style on the edge of the financial district of Manila (Makati), but I am also downgrading that to the 3rd world one in which I will soon live. What I post are facts and truth as I see it, not faux patriotism or denial.

    I ignore Davy most of the time. He has nothing to say that will change my mind. Likewise, he should avoid my posts if it bothers him. Those who read both automatically side with the one they see as being true. It appears that most who side with me are outside the MSM Iron Curtain and see the truth. The few Americans inside who agree are only being honest with themselves. Nuff said.

  18. Davy on Sun, 29th Jun 2014 6:57 am 

    Mak, it is not about taking sides and that is the fundamental falsity of your argument. We are a global family not a bunch of competing bandits. It is your kind Mak that spells the end to any hope of human survival through cooperation and acceptance. You exposed your anti American mission in your comment above. You are not concerned with the truth when it does not align with your anti American mission. You both rail against MSM news and use it when it supports your hypocritical views. Your so called use of the facts are only in relation to your mission not the truth. The folks we rail against daily here have different missions but the same tools of bashing the opposition and supporting their drum beat. You are the same type of propagandist mission seeker. You have absolutely no balance whatsoever in your comments. Your arguments are old and stale regurgitations that bore the readers here. Balance would enliven your moldered thoughts. Spare me your earlier love for the US and your 14 generational bullshit. Too bad you don’t have any patriotism in you. Who said there is anything wrong with showing love for one’s country? I am very critical of the US and still love my country. You are a one sided propaganda machine pouring out scorn then pumping up your expat choice of East Asia. That shows me you have some deep seated psychological issue you are attempting to suppress. This indicates to me possibly a bad US experience coupled with a poor choice of a Philippians life boat. You are trying to suppress that cognitive dissonance bubbling up around you from a poor choice causing daily indigestion.

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