Iraq is home to the fifth-largest oil deposits in the world and currently produces about 4% of the global oil supply. Iraq is now the second-biggest producer in the OPEC exporters’ cartel, after Saudi Arabia. Earlier this year, Iraqi production hit a 35-year high of 3.6 million barrels per day (Mbpd)—up no less than 16% on the year before. The country’s output is set to grow to no less than 5 million barrels by 2019, according to the International Energy Agency, the Western world’s energy thinktank.
The oil-rich nation of Iraq has attracted U.S. oil majors, including Exxon Mobil Corporation (XOM) and Chevron Corp. (CVX), which have a strong presence in the Rumaila and Kurdistan regions of Iraq, respectively. ETFs like the SPDR Energy Select Sector ETF (XLE), the Vanguard Energy Index Fund (VDE), and the iShares Dow Jones US Energy Sector Index Fund (IYE) have major holdings in these companies.
The safety of Iraq’s oil-producing capacity, and the global energy market as a whole, is under threat from the ISIS insurgency. The conflicts have threatened some of Iraq’s oil infrastructure, including a pipeline that can deliver 600,000 barrels of oil per day from Kirkuk to the Turkish port city of Ceyhan.
Moreover, the conflict spreading further into the Kurdish region could disrupt the operations of the large Kirkuk oil field near the city of Mosul, which now produces around 260,000 barrels of oil per day and accounts for one-sixth of the country’s proven reserves. Iraq plans to invest heavily in that oil field in the years ahead.
As the Sunni insurgency heads south, though, towards Baghdad, the vital Basra port complex, the outlet for the 2.6 Mbpd of Iraqi crude exports that leave via the Persian Gulf, comes under threat.
How the conflicts impact oil prices
Though the ISIS conflicts have not yet disrupted the huge oil-producing areas in northeast and southeast Iraq, oil markets are already jittery.
The Brent crude oil price—a good metric for global oil prices—has hit the highest levels since September 2013. Crude oil is steadily approaching the $120–$125 danger zone. At that level, oil starts to impose serious economic damage on major energy importers. Over the last half century, pretty much every oil price spike has been followed, relatively quickly, by a recession in the Western world.
An oil price spike might mean the Federal Reserve will go easy on tapering and keep up quantitative easing.
To learn more about the rise in oil prices due to the tensions in Iraq, read the Market Realist series Must-know: Why the tensions in Iraq are buoying oil prices.