Iraq Threatens OPEC’s Power Over Oil Prices
Iraq’s production capacity is enough to create conflict within OPEC and even destabilize the Middle East. (image: z.about.com)
Iraq is threatening to throw a serious wrench into OPEC’s plans, reports Business Insider. OPEC members have said they are content with oil prices in the range of $70–80 per barrel and maintained their production targets at their recent annual meeting. But Iraq might not adhere to OPEC’s production quotas. The cash-poor country recently auctioned off some of its largest oil fields, with Russian and Chinese companies winning the most lucrative contracts. According to analysts, the auction could boost Iraqi oil production from 2.5 million barrels per day to as much as 12 million by 2016, which would quadruple its capacity and make it a rival to Saudi Arabia, the world’s biggest oil producer.
Such a drastic increase in oil production could threaten to undermine OPEC’s influence on oil prices, which currently stand at an amount that the Saudi Arabian oil minister, Ali al-Naimi, believes keep producers and consumers happy. If OPEC does not cut production to compensate for Iraq, the price of oil could drop significantly. OPEC will pressure Baghdad to adhere to their targets, but if Iraq flouts those targets there is little OPEC can do.
“This will certainly cause ructions within OPEC because Iraq has huge resources and we can only assume that the Iraqis are going to pump as much as possible because they need the money,” Judith Kipper, the director of the Energy Security Group of the Council on Foreign Relations in Washington, told Deutsche Welle. “If they get to the predicted number of barrels produced per day, this is really going to be a real issue within OPEC.”
During the 1990s, Iraq was exempted from OPEC’s output targets while the country was under international economic sanctions. While the country was subjected to UN-brokered rules regarding its output, it did not have to comply with the output restrictions that OPEC’s 11 other members had to.
In the current controversy, Baghdad might believe it should be allowed to pump as much oil as it can to compensate for decades of reductions due to economic sanctions and war.
“Most Iraqis understand that the reasons for their poverty and the reason for their isolation is the regime of Saddam Hussein,” said Hazhir Teimourian, a Middle East expert with the Limehouse Group of strategic analysts in London. “Now they realize that they are no longer isolated from the world and they’re going to make the most of their oil wealth.”
Experts also believe that besides causing problems within OPEC, Iraq’s growing influence in the oil market and the Gulf’s increased dominance over global oil resources could lead to political and military conflicts outside OPEC meeting rooms.
Josh Garrett says: says:
Thanks for your thoughtful and insightful comments, Mineral Guy. The scenario you outline here is a plausible one that would be great news for consumers of heating oil and other petroleum products in the US and around the world. While I agree that supply and demand will certainly determine the long-term fate of oil prices and the oil industry, I am wary of oversimplification of the oil market, especially in the short- and medium-term. Case in point: in 2009, overall demand for crude and all fossil fuels declined worldwide and supplies around the world reached record highs, yet the price of crude gained rose by over 70% in those 12 months. With that in mind, I must consider other factors that influence oil and energy prices besides supply and demand.
mineral guy says: says:
I don’t understand why people claiming to be experts in oil, and all its technical aspects do not look any further than at the laws of supply and demand. Oil like any commodity is subject to the laws of supply and demand over the longer term. Eventually those laws will prevail. Now of course, oil seems to have a large political component but that does not alter the fact that the supply/demand laws still apply. I can’t think of any mineral commodity the world has ever run out of. Nor can I think of a cartel that has withstood the ravages of time and not collapsed. I suspect OPEC is quickly falling into that morass today. We can expect two things to happen soon: the price of oil and energy will fall and the the OPEC Cartel will disintegrate into some undisciplined free for all.
This may be delayed if the Middle East blows up again(which I suspect becomes less likely over time) or we place onerous taxes on high carbon generating energy sources(it will be a long hard fight). Of course, it is also in the interest of the oil producers to keep the price of their product low in order to maintain their energy market share not overprice its product to encourage new energy source competition