The New (Oil) “Surge” in Iraq

The 2007 “surge” in Iraq was controversial at the time and remains disputed even today. Some argue that the deployment of 20,000 additional American troops was decisive in ending what was then a raging civil war. Others believe that different factors better explain why violence declined, including the rise of anti-Al Qaeda militias and—tragically—the successful ethnic cleansing of Iraqi neighborhoods, which erased points of friction by way of segregation. Now the “surge” is one episode in a long war that many Americans believe was a mistake.

Today, Iraq is preparing for a new surge. Like the first, it could help stabilize the country—but it will also have major implications for the region and the world. Unlike the first surge, however, this one does not include insurgents and armies. Instead, it involves engineers, geologists, field crews, surveyors and huge tankers. Iraqi oil production is rising steadily now that the occupation has ended, violence has subsided, and years of foreign investment is finally maturing. Every month it seems Iraq is setting new records for oil exports. While significant obstacles remain, the country is heading in the right direction economically.

The International Energy Agency released its special Iraq report on October 9. I’ll quote from the Executive Summary directly because it is so clear (all bullets are direct quotes):

  • In our Central Scenario [that is the likeliest, middle-of-the-road forecast], Iraq’s oil production more than doubles to 6.1 mb/d by 2020 and reaches 8.3 mb/d in 2035.
  • Iraq stands to gain almost $5 trillion in revenues from oil export over the period to 2035, an annual average of $200 billion and an opportunity to transform the country’s future prospects.
  • Over the current decade, Iraq accounts for around 45% of the anticipated growth in global output. Iraq becomes a key supplier to fast-growing Asian markets, mainly China, and by the 2030s Iraq is the second-largest global oil exporter, overtaking Russia.
  • There is a strong alignment between the needs of the global market for growth in Iraq’s production and the needs of Iraq for revenue to build the foundations of a modern and prosperous economy. Building such an economy and turning the country into a global energy powerhouse will not be an easy task, but this is a prize within the reach of the people of Iraq.

I won’t belabor any of these points here. They speak for themselves. But some deserve a brief second look. We should also consider the broader implications of Iraq’s rise as a petro-superpower with market-moving potential. Let’s start narrowly and widen the lens.

Inside Iraq, doubling the country’s oil exports will naturally increase Baghdad’s purse. That money must be reinvested in Iraq so that living conditions are raised after thirty years of war, sanctions, occupation, and sectarian conflict. It must also be spent on oil-related infrastructure that makes the new Iraqi oil surge sustainable. Development and prosperity are also essential if the authorities want to improve relations between Baghdad and outlying provinces, some of which are still suspicious of the central government. It’s possible that Iraq’s economy in 2035 could match Saudi Arabia’s economy as it stands today.

Iraq’s rise will also have an impact on its oil exporting neighbors. It could stoke a rivalry with Iran, as that country’s fortunes diminish and the oil sector struggles to recover because of severe sanctions. Big gains could also create friction between Baghdad and the Gulf Arab states if Iraq’s increased production lowers the price per barrel. With Gulf powers girding against unrest at home by spending billions on domestic welfare programs, budgetary bottom lines could turn into diplomatic red lines for neighbors who resent Baghdad’s rise. Today, OPEC holds to a production ceiling that is often crossed. But tomorrow we might be talking about reinstituting quotas, as Iraq sells significantly more oil, and North American production rises steadily, thus driving down prices and forcing Middle East producers to consider price stabilizing output cuts.

Beyond the Middle East, Asia has the most to gain from Iraq’s petrol-powered renaissance. The IEA estimates that 80 percent of Iraq’s new oil exports will go to China. Much of the country’s oil sector growth will be a result of close cooperation between Iraqi and Chinese firms as well. Generally speaking, there can be no question that the global economy needs Iraqi crude if it is going to recover from the recession and gain speed. As the IEA report states, Iraq will contribute one of every two new barrels added to the market by the end of the decade.

We should be optimistic about Iraq’s oil prospects. But there is also reason to believe some of Iraq’s toughest political problems will not be addressed soon. Speaking yesterday at the Center for Strategic and International Studies, Dr. Fatih Birol, the IEA’s chief economist, noted that 80 percent of new oil production from Iraq will come from the country’s southern fields. Why is this important? Fields in the south are undisputed. The central government in Baghdad has full control over them—unlike those in the north, which are claimed by the Kurds.

Right now Iraq is considering a new hydrocarbon law that has been on the shelf for years. If it ever becomes official, the law would settle who controls certain reserves, who can sign contracts with foreign oil companies, and who can market oil. It would also establish a more permanent revenue sharing agreement between Irbil and Baghdad. It’s worth pursuing because it would remedy uncertainty and political tensions. But does Baghdad really need a hydrocarbon law if Kurdish oil is not essential to Iraq’s progress? The IEA report estimates that Iraqi oil production will double by 2020–with or without the law.

Click here to watch video from yesterday’s event at CSIS. You can access Dr. Birol’s presentation also. The Iraq Energy Outlook report is available for free in PDF format.

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