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Iraq and geopolitics through the lens of the oil market

Iraqi's a waiting for hours in an attempt to buy fuel, and leave the country
Iraqi's a waiting for hours in an attempt to buy fuel, and leave the country
Photo by Dan Kitwood/Getty Images

Last weeks reports of the Sunni militant group ISIS taking over the northern cities of Iraq and working their way south to Baghdad were somewhat surprising but not entirely shocking. After all, there have been reports of fighting in the northern region for over a year, and earlier this year in January, Sunni militants took over the city of Fallujah.

However, what was a surprise was the speed in which they achieved this. In just a short amount of time the situation has escalated from violent protests, to a full scale over throw of the government. A government, and army who was hand picked by key US interests after the fall of Saddam Hussein. Yet the problem was that a vast majority of power was placed in the hands of the Shia’s and taken away from the Sunni’s, the sect that Saddam was associated with through the Ba’ath Party

Domestically, the sectarian violence between Sunni and Shia’s has driven a wedge in Iraq since it was declared the Kingdom of Iraq in 1932. Internationally that wedge has created a geo-political chess match with either sect becoming a pawn for Iraq’s most prized possession.

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When anyone talks about Iraq the subject that generally follows is of oil and who is in control of it. So it came as no surprise to anyone who heard reports of oil fields and refineries being taken over by ISIS after taking some key cities.

Last weeks turmoil ended with reports of battles at Iraq’s largest oil refinery in Baijia. Despite the distinction of being the largest refinery in the country the battle did not affect the international price of Brent Crude when markets opened on Monday. The reason for this is because the refinery is solely used for domestic production. This however comes on the heels last week when ISIS took over key cities, as a large portion of the Iraqi army laid down their weapons in retreat. By Friday’s market close, the damage was already done on the price of a barrel of oil. The cost saw a sharp increase in price from $109 a barrel on the June 12th, to a little over $115 by June 20th.

This week the price has continued steady, although it remains to be seen where the price of a gallon of gasoline will be by the time Americans begin their mass commutes for the fourth of July weekend. Nevertheless the price of a barrel for now has settled at the $113 mark.

What speculators and traders may have been most worried about during the initial reports was whether ISIS (Islamic State of Iraq and Syria) or ISIL (Islamic State of Iraq and Levan) will be putting pressure on the southern part of the country. The southeastern part of the country is where many of the oil fields are located, and conveniently spills out into the Persian Gulf. Regardless it is very clear that concerning Iraq, whoever holds dominance to the oil, possesses a valued treasure.

According to the U.S. Energy Information Administration:

“Iraq has the fifth largest proven crude oil reserves in the world, and it passed Iran as the second largest producer of crude oil in OPEC at the end of 2012.”

Yet despite that, there are many experts who feel that Iraq may still have a greater potential for energy development, which translates to massive profits. In other words years of wars and international sanctions have left the country financially crippled with many problems to their infrastructure, yet untapped resources remain stagnate, and ready for the taking.

This is where the northern reaches of the country may come into play as the situation unfolds. It is reported that just south of the northern city of Kirkuk lays a massive oil field; a virtual ‘sea of oil’. Although recent activity in Iraq has led to questions of transparency, there are estimates that say there are between 5 billion barrels to 16 billion barrels of oil in reserve in that area. For geographic reasons of transportation and expediency it makes some sense that oil fields in the south have received more attention due to their proximity to the Persian Gulf.

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Events like those in Iraq, only serve to magnify the fragility of the worlds growing energy needs. Yet unfortunately they may become a more common occurrence as developing countries modernize and expand their reliance on transportation.

Developing nations like the BRIC countries (Brazil, Russia, India and China) are buying cars at record rates. Yet with all of this expanding demand, has come greater pressure on countries to find and maintain supply of these finite resources. A pool of energy that is being consumed at a much greater rate than alternative energy options are being put on the market.

Over the last 15 years, Brent Crude, which is recognized as the international benchmark for oil has seen a steady rise in is price. Even if you take out the outrageous spike that occurred back in 08’, when the price went from $90 a barrel to $140, and then all the way back down to $30. You can see that there has been a steady increase in the price. In 1999, a barrel of Brent Crude was as low as an astounding $11.37. In 2006, at the height of the housing boom that price jumped to $76. In relative terms that price increase was a solid increase compared to just seven years earlier, but fast-forward two years into 2008 when that price nearly doubled. After that, the price plummeted back down to the $30 range, but has been on a steady increase ever since and today it consistently hoovers around the $100 mark.

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As of the time of this articles publication there are numerous counts of economic, political, and military unrest all over the world. Governments and corporations are all jockeying for an advantage in obtaining this limited natural resource. To add to this problem many of these locations are in some of the very poorest countries where the citizens are at the mercy of brutal dictatorships and kleptocrats who take big payouts from big oil. As this article is being written, there are numerous counts of economic and political uprisings concerning this issue.

The civil war in Syria has been going on for over three years. Since that time oil production in that country has plummeted as well as the chance of opening the Kirkuk – Banius Pipeline. This key pipeline begins in the aforementioned Kirkuk region of Iraq and flows into the Mediterranean through the area in Syria known as Banius.

Then of course there is the ongoing saga between Russia and the Ukraine. Ever since the invasion and subsequent annexation of Crimea, Russia has threatened to turn off energy pipelines going into the Ukraine. The reason being that the Ukraine has accrued a large debt owed to Russia for the natural resources. The Ukraine receives 40% of its natural gas and oil from Russia. The former Soviet republic is a major transit route for Gazprom; the Russian oil giant. In 2009 Russia did in fact turn off the pipelines into Ukraine during the winter month of January.

There are many analyst who feel that Vladimir Putin wanted Russia to regain control of the Crimean Peninsula, for reasons of oil transportation. The peninsula sits out on the Black Sea and triggers a path into the Mediterranean Sea. Russia is the third largest producer of oil in the world and feels they shouldn’t have to go through Ukrainian ports to ship it

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Africa is a continent of particular interest in the future of oil production and geo-politics, for many reasons.

Two names that come to mind regarding Africa and oil production are Egypt and Libya.

Just last year the price of oil spiked because of the Egyptians over throw of Muhammad Mursi. Mursi was the elected leader of the ‘Muslim Brotherhood’, who took it upon himself to toss out the constitution, and paid a dear price for that. The tension on the market was partially due to fears that the choke-point through the Suez Canal into the Mediterranean would be compromised.

The annexation of Southern Sudan from Sudan has done nothing to stop the brutal genocide that is occurring. Although there has been fighting and clashes between Sudanese in the North and South for sometime, it is no coincidence that the worst of the genocide occurred shortly after oil production in the country expanded in 2000.

In Nigeria there has been ongoing tensions since the 70’s between the people of that country and the Multi-national corporations that have come on to take the oil. Just as of last week Shell Oil, a major player in the Nigerian oil trade attempted to end a lawsuit filed by the Nigerian people. Shell offered to pay a settlement of $51 million dollars. The Nigerians who filed the lawsuit refused the settlement. Locals say that the spill consisted of 500,000 barrels of oil, and put the value much higher than $51millon. Over the years there have been multiple cases of kidnappings and bombings particularly of executives working for big oil companies.

In 2005 the Chinese government made a focused effort to court a host of African nations. This is something they have done with great success, the main reason being that as a communist dictatorship, China acts outside of rules of an international community. Meaning that if, for example, the U.S. desired to work a deal with a country known for oppressing its citizens then they would be subject to scrutiny from UN and its commitment to its Declaration of Human Rights. Now, this is not saying that government officials or corporations associated with the U.S. have not engaged in this type of activity. Its simply saying that in order to pull this off, takes a costly amount of third party associates to circumvent international law.

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