Part of The Islamic State in Iraq and Syria (ISIS)’s rise in Syria and Iraq can be attributed to sectarian politics. However, another major factor driving ISIS militants who have, since December 2012, targeted the local Shiite and oil facilities in the Sunni areas, is in order to gain control of some of Iraq’s oil proceeds. With the world’s second largest proven oil reserves within its borders and US giant oil companies running the majority control of Iraq’s oil industry, the question remains: what is the impact of ISIS on the world’s oil prices? And is this war by the US over ISIS all about oil?
Iraq has the fifth largest oil reserves in the world and third highest in the Middle East after Saudi Arabia and Iran. Its daily production was forecast to be approximately 3.4 million barrels per day, representing slightly less than 4% of the global production. 6 of 8 Iraq’s major oil fields lie in the Shiite South, which is unlikely to come under ISIS control. However, ISIS controls a few small oil fields in the north and some small refineries in Syria, which it uses to finance its operations. It sells crude at a steep discount, at a rate of USD $30 per barrel in the black market. By some estimates, oil production under ISIS controlled territory is around 80,000 barrels per day, which nets them a revenue of at least USD $1 million and possibly up to USD $3 million. Though, initial fears of higher oil prices have not materialized for many reasons, including the shale oil boom in the US and Saudi overproduction, the ISIS challenge is most likely to lead to lower oil production in Iraq that will further fluctuate the oil market.
Although the impact of the conflict on Turkey has not been as bad as expected, since oil prices have not depressed as rapidly as initially projected, the trade between Iraq and Turkey has suffered. Turkey runs a huge trade surplus with Iraq, which has slowed down dramatically due to lower demand from Iraq. Trade routes between the two have also been impacted due to the conflict. It has already damaged the oil pipeline from Kirkuk to Turkey, stopping the oil flow leaving trucks from Turkey no option but to take the longer route via Iran to reach southern Iraq, which reduces profitability to zero or below.
The main worry for Saudi Arabia is that the US may coordinate with Iran and Assad’s Syria against ISIS. Any cooperation between Iran and the US over ISIS could lead to a gradual withdrawal of sanctions, which would allow Iran to sell its oil on the open market and generate revenue. Ironically Iran’s oil would lead to depress oil prices further. Saudi Arabia is now trying to use oil prices to defend market share and send a political subtext by raising production even as oil prices fall. Attempts to keep oil prices lower by Saudi Arabia would certainly hurt Russia and Iran, since Russia needs oil prices near USD $100 to balance its budget and Iran needs high oil prices to balance its budget and support its nuclear program.
The risk the Saudis take by this measure is that lower oil prices could also hurt the shale oil boom in the US and Canada. It is crucial for Iran and Russia to avoid any further fall in oil prices so as not to avoid the risk of further destabilizing an already difficult situation. And if low sub $100 a barrel oil prices are a temporary phenomenon with higher oil prices predicted in 2016, then this calculated strategy should work. However, if deceased oil demand from the BRIC countries combined with an increased oil supply driven by both the fracking revolution in the United States and Saudi Arabian attempts to rule the world oil market, then Iran and Russia may have to confront several years of oil prices substantially below $100 a barrel.
The question about war against ISIS is not whether it can be won but where it will lead. American policy assumes that allies will rally a Shiite-led army to fight ISIS in the country’s Sunni heartland. On recent evidence, this assessment looks unrealistic. The combination of the ISIS insurgency and low oil prices are producing an economic shock unprecedented in the Middle East and Russian troubled history. In the twelve years since the U.S. led invasion overthrew Saddam Hussein, oil producing Arab countries have faced brutal conflict and sharp drops in oil prices since mid 2014. If world oil prices average $60 per barrel in 2015, then the combination of falling world oil prices and the ISIS conflict has resulted in the most serious fiscal and exchange rate challenges in Middle East since the 2003 invasion.
The US plans to overthrow Assad which its regional allies is a plausible cover for their plans to remove the force of the Islamic State of Iraq and Syria (ISIS) taking control of Iraq’s vast energy resources and the supply routes through its territory. Following the invasion of Iraq in the 2003 war, US oil giants rushed in to run Iraq’s oil industry. Although they could not ensure the passage of the hydrocarbon law that would have given them ultimate control of Iraq’s oil, they were able to shop Iraq’s oil to Western companies, after an absence of three decades, on very lucrative terms.
The oil industry in Iraq is now run by international corporations such as BP, Exxon-Mobil, Shell, Chevron, the French company Total as well as Russian, Chinese and Malaysian and a group of smaller companies. Earlier in 2014, Russian oil giant Lukoil started production at the giant oil field of West Qurna 2, south of Basra, which is possibly the world’s largest untapped field, with oil reserves believed to be about 20 billion barrels. In the Kurdish autonomous region, the oilfields that were largely neglected before 2003 have come into play. As a result, Kurdish oil is used in Turkey and not sold on the world markets for fear of lawsuits brought by the Iraqi government. About half of all Iraqi oil is exported to China, which recently became the world’s largest oil importer. Last year, PetroChina, one of China’s four state-owned energy corporations, bought a stake from Exxon in the southern Iraqi oil field West Qurna and bought into three other large fields.
The US and its allies have no plans of surrendering the oil contracts now controlled by Western companies. The US is determined to hold onto its unrestricted access to oil and gas, while determining how much of these crucial energy resources are available to other countries, especially to its rivals China and Russia. The International Energy Agency forecasts that North America alone will be supplying 61% of new growth in global oil demand by 2018. Any interruption in Iraqi output would only invite further investment in non-OPEC regions such as North America, which would be a perfect end to an unholy oil war.