With the world’s fifth-largest petroleum reserves, Iraq has – at least on paper – considerable potential for boosting production. If its goals are reached, it will bring the country’s production to a level rivalling that of the world’s largest oil exporters such as Saudi Arabia and Russia. At present the country produces around 3 MMbopd and the goal is to reach over 4 MMbopd by the end of the year, scaling up to 9 MMbopd before 2020, to help boost economic growth after many years of war and internal conflict. Iraq has started to plan for a possible return to OPEC’s quota system, marking a change of political stance and reducing the likelihood of the market being flooded with oil. But how easy will it be for the member countries to agree on new production quotas without creating serious internal disputes, potentially leading to a collapse in oil prices?
OPEC’s mission is to coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry. Collaboration, however, is frequently tested by disagreements. In fact, OPEC’s cooperation may soon be put to the test as, given the shale revolution in North America, non-OPEC oil production is forecast to expand by 1.5 MMbopd in 2014, whereas world oil demand is projected to grow at a somewhat lower pace, around 1.2 MMbopd. This means that demand for OPEC oil will be lower than the cartel’s total production quota of 30 MMbopd, which could lead to falling oil prices – or OPEC must cut its production to stabilise the situation.
Pressure on Oil Price
If Iraq succeeds with its ambitious plans, OPEC members will intensify pressure to include it in their system, but renegotiations of quota allocations between member countries will increase the risk that the cartel’s total production target is exceeded. And if negotiations with Iran on its nuclear programme proceed and sanctions are lifted, it will also step up its oil production. In addition, should political turmoil fade in countries like Nigeria, Libya and South Sudan, production there will pick up again; should this happen without other OPEC members cutting their production, a sharp oil price decline to around US$90/ barrel may result.
If Iraq were to challenge Saudi Arabia’s position as the world’s swing producer by neglecting production quotas and pumping oil into the market, a prompt response from the cartel’s de facto leader may be expected, similar to when it flooded the market at the end of the 1980s when cartel members did not adhere to their production quotas. Oil prices plummeted, which would be a considerable challenge for most of the OPEC members, as oil and gas account for a significant share of their export revenues, investments and sources of economic growth. A large oil price decline could test the economic position and stability of these countries. Both Iran and Iraq require oil prices of over US$100/barrel to balance their budgets, according to the International Monetary Fund.
So what are the chances of this short term? Iraq faces a number of major challenges which must be overcome to reach its ambitious production targets. Lack of infrastructure for increased exports, pipelines and refineries could act as a damper on capacity expansion efforts. The country has still not managed to agree on a hydrocarbon law to provide a framework for investments in the oil sector and the distribution of oil revenues, while growing political unrest increases the risk of production disruptions.