WASHINGTON — If the conflict in Iraq forced a third of the country’s oil production offline, it could thrust crude prices up $40 per barrel, a group of former military leaders and energy experts warned Tuesday.
Although supply fears have abated slightly, the conflict has so far increased the “risk premium” embedded in international oil prices and put Brent crude at $113 per barrel mid-Tuesday. It also helped put gasoline prices on track to hit a six-year high.
Further unrest in Iraq could cause oil costs to soar much higher, given the limited buffer of production capacity worldwide able to make up for any significant strife-related shortfalls, according to a new report from Securing America’s Future Energy. Iraq is the second-biggest producer in OPEC, the Organization of the Petroleum-Exporting Countries, and Saudi Arabia was already under pressure to boost production an additional 900,000 barrels per day just to keep up with rising global demand.
“The loss of even one third of total Iraqi production — 1 million barrels per day — would essentially eliminate global spare production capacity,” SAFE says in the new paper. “In that event, oil prices would likely reach or exceed the highs reached in July 2008.”
Fodder for fuel alternatives
Concerns about the turmoil in Iraq are giving fresh fodder to those like SAFE who want the U.S. to wean its cars and trucks off oil as a fuel source and to rely more on alternatives, such as natural gas.
One of those natural gas supporters, Texas oilman T. Boone Pickens, has separately predicted that if Iraq’s oil supply were completely shut off — a less-likely scenario — crude prices could hit $200 per barrel.
Despite soaring U.S. production — about 8.2 million barrels per day in March — the nation still imports large amounts of foreign crude. And regardless of the source, American households, businesses and public agencies spent $870 billion on petroleum fuels in 2013, essentially 5 percent of U.S. gross domestic product, SAFE said.
The U.S. exposure is heightened as crises unfold around the globe, SAFE says:
From the Russia-Ukraine crisis and maritime disputes in the South China Sea to continued oil theft and infrastructure sabotage in Nigeria and political instability in Venezuela, the United States remains dangerously exposed to the vagaries of the global oil market and must intensify efforts to reduce its dangerous dependence on oil.
“America’s leaders have to act,” said SAFE CEO Robbie Diamond. “The situation in Iraq has the potential to inflict serious damage on the U.S. and global economies.”
“Now is the time to commit to policies that will end oil’s monopoly over the U.S. transportation sector, bolstering our economy and reducing its exposure to the high and volatile oil prices generated by events beyond our control,” Diamond added.
Conflict politics: Iraq turmoil feeds calls for Keystone XL
SAFE’s report highlights the critical role Iraq plays in supplying the world with oil. The International Energy Agency has said Iraq would account for 60 percent of the increase in OPEC oil production capacity between now and 2020 and be a major driver of global crude production growth even after that point.
The analysis also documents the link between oil price shocks and economic activity in the United States. Every U.S. recession since 1973 has been preceded by or occurred during an oil price spike, the report notes.
John Kingston, global director of news for Platts, stressed that there has been “no immediate impact on supply as far as we can tell, though there has been an immediate impact on price.”
Although it is unclear what supply disruptions may be on the horizon, Kingston noted in a presentation Tuesday with Standard & Poor’s Rating Services that previous shutdowns are unlikely to be quickly reversed amid the violence. Most notable: The pipeline that transported up to 600,000 barrels of crude oil daily out of northern Iraq from Kirkuk to Turkey has been offline since March.
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