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Deflating the oil myth

Deflating the oil myth

By Ashwath Komath,

Edited by Nidhi Singh, Associate Editor, The Indian Economist

The recent ISIL crisis in Iraq has sparked fears about oil in the international community. The underlying fears are that the fighting happening in Iraq will disrupt the supply of oil in the international market. While on the face of it, the fears seem reasonable, the truth is a little more complicated from the rather simplistic reasoning.

First of all, let us understand something about the Iraqi oil industry.

Iraqi oil is nationalized. The government of Iraq has absolutely no control of oil resources in Iraqi Kurdistan. The revenues from Iraqi Kurdistan go to the Kurdish Regional Government.  Iraq’s oil producing capacity was seriously inhibited due to decades of war and crippling sanctions prior to 2003. The United States government estimated that restoring oil production from Iraq will require a sum of $100 billion over a minimum of 10 years. Needless to say, the $100 billion never came because the investments are too risky with returns coming in too late, which again weren’t guaranteed.

Production of Iraqi oil as of April 2013 was nearly 3 million barrels a day, with an export capacity of nearly 1.9 million barrels a day. It isn’t much compared to other oil producers such as Saudi Arabia and the Russian Federation.

Secondly, let us map the current pursuits of the ISIL.

The ISIL has made inroads in the northern parts of Iraq. Cities like Mosul and Tikrit lie to the north. Most of Iraq’s oil reserves are in the South of Iraq which has been relatively insulated from ISIL’s pursuits and seem to be well-defended. The same applies to the Kurdish areas of Iraq which has been secured by the Kurdish Peshmerga, i.e. the Kurdish militia, which secures Iraqi Kurdistan and takes orders from the Kurdish Regional Government. The Kurds have also secured vital pipelines transporting the oil.

So most of the oil fields are secure and are pumping oil. The “big victory” that the ISIL claims is the Baiji refinery. Baiji is not an oil field. A refinery is part of the infrastructure that processes crude oil which is then shipped out, but it isn’t an oil source itself. So the fall of Baiji has reduced the refining capacity of Iraq, not its oil supplies. Even if the refining capacity has gone down within Iraq, all it needs to do is transport the oil to refineries in nearby countries through pipelines or ships and refining can continue. Countries such as Kuwait, Iran and Turkey would be more than happy to oblige. India imports crude oil and not refined oil; given India’s enormous capacity to refine oil domestically, the ISIL crisis should not affect the crude oil prices.

Thirdly,the shortfall from Iraq, if any, can always be compensated by nearby Gulf states such as Saudi Arabia, Kuwait, UAE, Oman, Qatar, Bahrain and Iran. With sanctions rolling back, Iran can step up its own production of crude oil to stabilize the markets. Countries like Saudi Arabia have the ability to step up production within weeks to compensate for such losses in the international market.

It becomes a matter of necessity for the Iraqi government to keep the oil pumping, and if possible, increase revenues from oil production because they need money to finance campaigns against the ISIL. Just a few days ago, Iraq purchased five second-hand Mig-25 aircraft from the Russian Federation in order to fight the ISIL. It is imperative for the Iraqi government to keep the oil flowing if they want to win the war against ISIL.

Any shocks in the international market in the crude oil exchanges is a result of induced hysteria which surrounds the conflict. While the ISIL is dangerous, what also needs to be focused on is the Iraqi campaign against the ISIL. Reportedly, the Iraqi government has started a counter-offensive and has managed to push the ISIL out of Samarra and are currently fighting it out in Tikrit with the Iraqi government on the offensive. Abu Bakr Al Baghdadi may have declared a caliphate in the captured areas, but he may be repulsed soon. Lessons can be taken from Syria where ISIL suffered the same fate meted by the Assad regime.

India, in particular, shouldn’t face a price rise in crude oil because of the fact that firstly, India doesn’t import a lot of oil from Iraq. Even in a hypothetical situation where all the Iraqi oil is cut off, it isn’t in quantities which can’t be replaced by other countries. Secondly, India imports crude oil, not refined oil. ISIL may have captured a big refinery, but the oil fields are still not affected.

Ashwath is a graduate in Political Science from Fergusson College, Pune. He is an aspiring diplomat and hopes to join the Indian Foreign Service someday. He enjoys writing about foreign policy, international security and international affairs. When he is not writing or reading, he enjoys playing pool with his friends, watching foreign cinema and listening to instrumental music.

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