Tensions in Iraq could roll up on our shores and hit the US economy directly, even if we never fire a shot in the current conflict. While military experts analyze the progress of the Sunni militants and Iraq gradually fractures into three pieces, economic experts are keeping a nervous eye on crude oil production.
Right now the fighting has been largely confined to northern Iraq, which accounts for less than a quarter of the country’s entire oil production. Any serious disruption of the 2.3 million barrels a day of oil exports by Iraq, which is OPEC’s second largest exporter of crude oil, could produce a price shock in world markets.
Brent crude, already projected to top $116 a barrel by the end of the year, was already trading at $112 — and how high it can go is now anyone’s guess. A lot will depend on the situation on the ground halfway around the world.
So far, Iraq’s army has managed to stave off the disaster of losing Baghdad, by rushing troops to the north of the city. The army’s numbers have been swollen by volunteer Shia fighters as it sinks in that, this time, no one will be sending in troops to bail them out. According to the Telegraph, the Iraqi army is claiming to have retaken some land north of the city, including the cities of Mutasim and Ishaqi.
It’s possible that Iraq will transition from one giant, unstable country into three stable smaller ones…
The rebels themselves have done their part to inspire and strengthen resistance, by posting graphic images of the massacre of civilians and captured soldiers, and the beheading of a local police chief. Soldiers contemplating abandoning their uniforms and leaving their post now know what treatment they can expect from the ISIS militia.
The instability in Iraq has introduced wild volatility into world oil markets. Gas prices in the US have already started climbing, with some experts predicting increases of $0.05 to $0.20 per gallon in the near-term — but that estimate will go out the window if the situation in southern Iraq deteriorates. For now the fighting has not spilled over into the Shiite-controlled oil production and export terminals in the southern part of the country. The militants have control of the Baiji refinery, the largest in the country, and the pipeline from the northern oil fields has been shut down since the conflict started; but that reduction in capacity is not seen as a threat to global oil markets.
Even though Kurdish forces moved into Kirkuk to protect the northern oil fields, the militants have still been able to secure some oil production capability, military grade weapons, and at least some aircraft seized from Iraqi weapons depots and military airfields.
Gold prices rose with crude oil futures as tensions in the Mideast increased, with gold reaching $1,284 before dropping back to $1,272 in late trading on Monday. The demand for US treasuries rose on the news from Iraq, but the dollar slipped — investors fled to the Swiss franc and Japanese yen as safe harbor currencies.
It’s possible that Iraq will transition from one giant, unstable country into three stable smaller ones, with the Sunnis in control of the north and west, the Kurds seizing the northern oil fields, and the Shiites in control of the south. Even if that happens, the transition won’t be smooth, and it won’t be fast. If the militants manage to get as far as Basra, then expect crude prices and, ultimately gasoline prices, to blow through the roof.