The bombings in Iraq go on and on, but the United States’ resolve to go the distance remains unwavering, the President tells us. But is it reasonable to assume that the White House will keep the troops in Iraq through the end of Bush’s term, which ends in January 2008? If so, will the U.S. military stay in Iraq on through the next administration? Or is there a chance that America will conclude that its presence should end sooner rather than later?
These are awkward questions politically, to say the least. They are also highly relevant ones when considering oil’s outlook for the long-term. Nonetheless, the issue of Iraq as regards oil is something less than the world’s most-discussed topic.
That needs to change, if only to weigh the implications of an unexpected exit of American forces from Iraq. Inconceivable? Perhaps, although far from impossible. The answer ultimately depends on how the American public reacts in the months ahead to the ongoing insurgency in Iraq. And with news today from the Wall Street Journal that public support for Bush generally is waning this is no time to be dismissive of what may come in regards to Iraq. Yes, it’s just one more poll, which is something to take with a grain of salt. Still, it’s less than encouraging these days.
The Economist (subscription required) recently broached the topic of pulling out of Iraq in not so subtle terms, observing that “America and its dwindling band of allies are entitled to consider whether the least bad option might now be, in the pejorative jargon, to ‘cut and run.’ A respectable case for leaving early can certainly be made.”
If so, what, if anything, might an exit, inglorious or not, mean for the oil market? Better to calmly consider the question now, when something of a relative calm describes energy trading at the moment as the price of oil closed down sharply today, below $58, in New York futures trading. As a start, it pays to review what role Iraq currently plays as an oil supplier in the global economy. That includes noting that Iraq’s 115 billion barrels of proven oil reserves rank third in the world, after Saudi Arabia’s 263 billion and Iran’s 133 billion, according to the Energy Information Administration. Quite possibly, Iraq’s reserves are significantly higher, although that’s an unknown that can only be resolved with additional exploration. Don’t hold your breath any time soon considering the events on the ground.
Even third place ensures that Iraq’s role in the oil markets will loom large for decades to come. Simply put, Iraq’s known reserves are too valuable to overlook, for good or ill. That said, the country’s oil production has been running well below its potential, courtesy of terrorism and other factors that flow from having the U.S. and its allies try to reinvent the political landscape. As such, Iraq’s daily oil production last year was a bit above an average of two million barrels a day. That’s still high enough to put the country into the upper ranks of producers, although it’s significantly below what Iraq was producing in 1979, when daily production average about 3.5 million barrels a day.
It doesn’t take a Ph.D. in economics to realize that Iraq is still critical to the world’s oil supply. A substantial reduction in output, much less a complete shutdown of crude’s flow from the country holds the potential to cause stress of no small significance in the global economy. Unfortunately, reasonable and not-so-reasonable minds know as much. Indeed, oil is no less important to Iraq domestically as it’s still the primary economic engine for the country. Accordingly, its oil infrastructure, creaking though it is from years of neglect, remains a bulls-eye target for those who wish the country harm. No surprise then that Iraq has lost more than $11 billion in damages to its oil infrastructure since June 2003, says Assem Jihad, an Iraqi oil ministry spokesman via AsiaNews. Imagine what the losses would be without an American presence.
“The insurgents know that oil is the lifeblood of the Iraqi economy, and that keeping it from improving daily life is key to building up the frustration and sense of helplessness and lack of faith in the new government–all of which they are out to encourage,” Gal Luft, codirector of the Institute for the Analysis of Global Security in Washington, tells the Christian Science Monitor today.
Alas, what’s bad for Baghdad is bad for Washington, along with New York, Los Angeles, Des Moine and every town and city from Singapore to Sao Paulo. Oil, of course, is a fungible commodity, and so any thing that drives the price of crude up in Baghdad does no less in Bakersfield. If nothing else, the Americans help keep the Iraqi oil flowing. But for how long?
For the moment, there may be more pressing oil issues to focus on. But it will all pale by comparison if the U.S. beats a hasty retreat and Iraq’s oil industry is left to the mercies of the jihadists. Will it happen? Could it happen? Unlikely…for the moment, although it wouldn’t be the first time a world power surprised the pundits with a sudden bout of exodus from foreign terra firma.
If there’s anything that the 21st century has taught investors it’s to expect the unexpected, particularly when it comes to oil, where the stakes are high and so is the volatility. Maybe it’s time to start monitoring the Pentagon’s press briefings for the latest clues on where crude’s future ultimately lies.