Escalating tensions in Iraq have increased concerns about the supply of oil from the major oil-producing country. The fighters of the Islamic State of Iraq and Syria have taken control of several cities in the northern end of the country, including Mosul and Tikrit. Iraq’s main oil fields and export facilities are located near the city of Basra in the south. However, if the fighting spreads to the southern end of the country, supplies could be disrupted for a considerable amount of time.
Iraq has re-emerged as a critical source of oil in recent years. Iraq is the second largest oil producer in OPEC and has the largest growth among the 12 member countries. Before the current turmoil, participants in the oil market had been expecting the supply from Iraq to continue to grow. Analysts estimated that Iraq could eventually produce about 6 million barrels a day, up from about 3.3 million barrels a day now, as a result of international oil companies’ investments in the country’s oil fields.
While it is unlikely that a sharp spike in prices will occur, prices are expected to remain relatively high due to the fighting in Iraq and turmoil in other major oil producing countries. This could put upward pressure on the price of gasoline in the United States throughout the summer driving season. Richard Mallinson, an analyst at Energy Aspects in London, said, “I think the upward movement is justified even though the direct threat to Iraqi supply is low.”
The geopolitical dynamics in the Mideast have kept oil prices remarkably stable for the last three years, although prices are relatively high compared to previous years. In recent days though, the price of oil has been rising modestly. In a note to clients, Edward L. Morse, head of commodities research at Citigroup, wrote that the Russian annexation in Crimea and the chaos in Libya “point to a systemic and seismic shift geopolitically.”
The heightened concerns means that the oil markets are likely to remain on edge for some time. Mr. Morse wrote, “The longer the insurgency lasts, the more difficult it will be for Iraq to reach its potential,” adding that the change in outlook on Iraq “has radical implications for oil markets at a time of growing lost production worldwide due to intensifying disorder in a growing number of petroleum-producing countries.”