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WHAT WE'RE THINKING
The following opinion pieces were written by researchers, fellows or scholars.
The research and views expressed in these opinion pieces are those of the individual(s),
and do not necessarily represent the views of the James A. Baker III Institute for Public Policy.
Tuesday, December 12, 2006
Regional Politics In The Persian Gulf: A View Related To Oil Markets
Amy Myers Jaffe, Wallace S. Wilson Fellow in Energy Studies
The Baker-Hamilton Iraq Study Group (ISG) recently concluded that the situation in Iraq was “grave and deteriorating” and that failure to address the slide toward chaos could have “severe consequences” for the Middle East, home to 60% of the world’s known oil resources. The study group suggests that “other countries in the region fear significant violence crossing their borders. Chaos in Iraq could lead those countries to intervene to protect their own interests, thereby perhaps sparking a broader regional war.”
It goes without saying that broad regional conflict in the Middle East could have dramatic impact on the international oil market. This is not to say that oil is the only reason to care what happens in Iraq (humanitarian and security considerations, to name a few, being of a higher order concern). But oil is not one to ignore either.
Let there be no mistake. A full-scale civil war in Iraq which would spread beyond its borders could cause a major disruption in world oil supplies, not just during the conflict, but in the years of recovery afterwards.
In the eight-year war Iraq fought with Iran, key regional oil infrastructure was destroyed, including both Iraq’s and Iran’s main oil export terminals. Planned oil field expansion in both countries was halted. Saudi Arabia and some other producers did a masterful job to bring on replacement supplies during this time period, ameliorating the impact to consumers, but the years of reconstruction for these war-torn industries (still underway or in planning) is one key reason why the global oil market is still so tight today.
Forecasters project that it will take 40 to 50 million barrels a day of OPEC production to meet future oil demand by 2025. OPEC’s current oil production capacity is little over 30 million barrels a day.
Under a Persian Gulf regional conflict scenario, supply from OPEC would most likely to go down, not up. Without sustained capacity gains from Saudi Arabia, Iraq, Iran and Kuwait in the next 10 years, consuming nations will almost certainly have to look for alternatives to oil.
Persian Gulf conflicts are already affecting the oil market this year. Iran has threatened to withdraw its oil from the market in the exchange of rhetoric regarding UN response to its nuclear weapons program. But this option may be constrained by the ability of other regional oil producers like Saudi Arabia to increase production to make up for any Iranian shortfall.
To circumvent other regional producers like Saudi Arabia from replacing lost Iranian oil supply should a conflict break out, or even just to try to influence events in Iraq, Iran could resort to military means to threaten flows of Arab oil. Such threats would not necessarily have to take the form of armed military campaigns but rather could include terrorist attacks on Arab oil facilities or even fomenting of political unrest in oil-producing regions inhabited by Shi’a populations. Iran could also try to foster a Shiite oil belt to extend from its own fields, into southern Iraq and into the Shiite populations of the lower Gulf.
Saudi Arabia is well aware of the threat of Tehran to Iraq and to the Gulf. One speculative scenario that has been circulating in oil markets is that Saudi Arabia may choose to flood oil markets by increasing production to maximum capacity, in order to put the Iranian regime under financial pressure by lowering oil prices.
Iran’s economy remains its Achilles heel. Rapid growth in government spending and liquidity—both needed by the ruling regime in Iran to maintain support— would be hard to sustain at lower oil prices. Iran would also be hard pressed to fund investment programs in its oil sector.
And what of Iraq’s oil industry itself? Continued conflict will wreak further havoc on an already damaged oil sector, lengthening the time it would take for reconstruction and revitalization of resources. There has been little or no recent investment of late by Iraq’s central government in the Iraqi oil sector. The main reason for this lack of investment has been the politicization of the oil ministry, the exodus of trained personnel, and poor and corrupt management. The lack of adequate security also poses a major challenge for the government in the oil sector. If conditions don’t improve, it is highly likely that Iraq’s production could wind up going down, not up.
So much is at stake from an oil point of view to prevent the escalation of sectarian violence in Iraq. The ISG report recognizes this is one of the elements that need to be addressed. Politicians would do well to acknowledge such realities.
For more detailed information on Iraq’s oil sector, Amy Myers Jaffe has published a new research paper: Iraq’s Oil Sector: Issues and Opportunities.
It goes without saying that broad regional conflict in the Middle East could have dramatic impact on the international oil market. This is not to say that oil is the only reason to care what happens in Iraq (humanitarian and security considerations, to name a few, being of a higher order concern). But oil is not one to ignore either.
Let there be no mistake. A full-scale civil war in Iraq which would spread beyond its borders could cause a major disruption in world oil supplies, not just during the conflict, but in the years of recovery afterwards.
In the eight-year war Iraq fought with Iran, key regional oil infrastructure was destroyed, including both Iraq’s and Iran’s main oil export terminals. Planned oil field expansion in both countries was halted. Saudi Arabia and some other producers did a masterful job to bring on replacement supplies during this time period, ameliorating the impact to consumers, but the years of reconstruction for these war-torn industries (still underway or in planning) is one key reason why the global oil market is still so tight today.
Forecasters project that it will take 40 to 50 million barrels a day of OPEC production to meet future oil demand by 2025. OPEC’s current oil production capacity is little over 30 million barrels a day.
Under a Persian Gulf regional conflict scenario, supply from OPEC would most likely to go down, not up. Without sustained capacity gains from Saudi Arabia, Iraq, Iran and Kuwait in the next 10 years, consuming nations will almost certainly have to look for alternatives to oil.
Persian Gulf conflicts are already affecting the oil market this year. Iran has threatened to withdraw its oil from the market in the exchange of rhetoric regarding UN response to its nuclear weapons program. But this option may be constrained by the ability of other regional oil producers like Saudi Arabia to increase production to make up for any Iranian shortfall.
To circumvent other regional producers like Saudi Arabia from replacing lost Iranian oil supply should a conflict break out, or even just to try to influence events in Iraq, Iran could resort to military means to threaten flows of Arab oil. Such threats would not necessarily have to take the form of armed military campaigns but rather could include terrorist attacks on Arab oil facilities or even fomenting of political unrest in oil-producing regions inhabited by Shi’a populations. Iran could also try to foster a Shiite oil belt to extend from its own fields, into southern Iraq and into the Shiite populations of the lower Gulf.
Saudi Arabia is well aware of the threat of Tehran to Iraq and to the Gulf. One speculative scenario that has been circulating in oil markets is that Saudi Arabia may choose to flood oil markets by increasing production to maximum capacity, in order to put the Iranian regime under financial pressure by lowering oil prices.
Iran’s economy remains its Achilles heel. Rapid growth in government spending and liquidity—both needed by the ruling regime in Iran to maintain support— would be hard to sustain at lower oil prices. Iran would also be hard pressed to fund investment programs in its oil sector.
And what of Iraq’s oil industry itself? Continued conflict will wreak further havoc on an already damaged oil sector, lengthening the time it would take for reconstruction and revitalization of resources. There has been little or no recent investment of late by Iraq’s central government in the Iraqi oil sector. The main reason for this lack of investment has been the politicization of the oil ministry, the exodus of trained personnel, and poor and corrupt management. The lack of adequate security also poses a major challenge for the government in the oil sector. If conditions don’t improve, it is highly likely that Iraq’s production could wind up going down, not up.
So much is at stake from an oil point of view to prevent the escalation of sectarian violence in Iraq. The ISG report recognizes this is one of the elements that need to be addressed. Politicians would do well to acknowledge such realities.
For more detailed information on Iraq’s oil sector, Amy Myers Jaffe has published a new research paper: Iraq’s Oil Sector: Issues and Opportunities.
