Will Iraq Wreck World Economic Recovery?

PUBLISHED: 13 Jun 2014 @ 08:13 | Comments (3) | More info about Lou Gutheil

Is it possible that what happens within the country of Iraq, a veritable poster child for middle eastern turmoil, could have so great an impact as to cause the fragile economic recovery to collapse? The worry on the street is that the answer is “Yes.”

The world is a crazy place to live, but it’s the only planet I know that supports life, so I guess I am here for the long haul. Syria is three years into a civil bloodbath with tens of thousands of deaths and refugees fleeing across the country’s borders in the hundreds of thousands. Egypt has been in turmoil almost from the day that President Obama thumbed his nose at then-President Mubarak in favor of visiting with Mohamed Morsi. Its economy is on the brink of collapse as well. Now, oil-rich Iraq, the albatross around the neck of the U.S., seems destined for political collapse in the very near future as conquering rebel forces march southward whilst government troops cut and run.

The FTSE, the S&P and the Dow, each recently pressing to new heights, all closed down today in what insiders say is the threat to Iraqi oil production. The Dow dropped more than 100 points.

On the obverse, the price of Brent crude oil surged to £67 (US $113) per barrel, approaching the price during the infamous Arab Spring. Chris Skrebowski, former editor of Petroleum Review described the situation rather gloomily: “Iraq is turning into a nightmare. There are real risks that this movement will spread to other countries. Our economies are too weak to pay for oil at $120, and they can’t stand $140 if it spikes that high.” Others note that a full-blown Iraqi civil war could plunge at least some countries back into recession.

While the major news networks seem to be ignoring the situation in Iraq, ISIL forces have captured Mosul, Tikrit and Fallujah. Latest reports have them coming down the Euprates less than 60 miles from Baghdad. The Sunnis who have launched the attacks are said to be “too radical even for Al-Qaeda” and reminiscent of the 8th century Caliphate. It is highly unlikely that any continued conflict will come without some cessation of oil production. Iraq’s oil production is already down ten percent since March.

The average person would think that the world has become less dependent upon Iraqi oil since the days of Saddam Hussein. In fact, the very opposite is true. The world has become more dependent upon Iraq oil than ever before. The Dow Jones Transportation Average dropped as fears of oil becoming available mounted. Increasing the angst worldwide, President Obama said that he would not rule out U.S. airstrikes in Iraq if needed.

Meanwhile, investor confidence in oil producers in Iraq has eroded again.

Gulf Keystone Petroleum (LSE:GKP) fell 16%
DNO ASA (DNO:OSL) fell 8%
Genel Energy (LSE:GENL) has fallen 5% over the last two days

Although there have been no threats directed at oil production facilities, “If [Isis] is able to make southward progress towards Baghdad, this will heighten instability in the country and possibly threaten the smooth operation of existing refineries and oilfields,” according to Michael Lewis at Deutsche Bank.

Tom Pugh of Capital Economics added that, “Continued fighting between insurgents and the army will make it largely impossible to develop the resources in the northern and eastern parts of the country, severely reducing Iraq’s ability to lift output.”

In the meantime, keep an eye on Iraq.

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