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The Iraq Crisis and the Impact on Oil

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Unrest in Syria and Iraq have been having a profound economic impact on both the region and the world as a whole. As fierce combat continues and ebbs ever closer to the oil refineries, the oil markets are beginning to get jittery. Earlier this year, a refinery at Baiji was seized following a week of fighting. It is Iraq’s biggest refinery. Understandably, these actions are pushing up oil prices.

The Geography of Oil and the Conflict in Iraq

Much of the combat is taking place in the north of Iraq. The majority of oil production in Iraq, however, is in the south of the country. Therefore, the threat to oil production is not immediate or direct as things stand. What is significant, however, is the effect this fighting is having on operations and investment. Against such an uncertain and volatile background, oil companies are more reluctant to invest much-needed capital into the oil industry in Iraq. Similarly, key employees are less willing to relocate there to work.

Why Oil Prices Are Rising

Whilst Baiji was successfully seized – resulting in the halting of production – reality is that most of Iraq’s oil production is located well away from the conflict. The northern region of Iraq does have a huge oil reserve – perhaps the second-largest conventional reserve in the world – but the Iraq war hampered production and it has not since recovered. This makes it much less important internationally than it perhaps should be. The Iraqi government has been regarded by some in the industry as being difficult to deal with and less co-operative than others in the region; reasonable speculation suggests that this has significantly slowed investment in the country, leading to difficulties with infrastructure and maintenance.

The market simply regards trouble in the Middle East as being bad for business and reacts by pushing up prices. This is driven by general fear and uncertainty and may not be an accurate reflection of what is actually happening on the ground. In fact, the oil price should not be much affected by the crisis, but uncertainty and fear are having an effect. Industry analysts are looking for a deal between Tehran and Washington on nuclear sanctions, which would allow Iranian oil to come on to the market, boosting supplies and making up for any shortfall caused by the Iraq crisis.

A Look to the Future

The West is still very dependent upon Middle East oil, and any disruption in the region is sure to have an effect. As tensions grow and artificially created countries such as Iraq threaten to fragment, production would undoubtedly be affected and prices would rise.

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