Will the Trouble in Iraq Raise Fuel Prices? That Depends on What WE Do

Saturday, June 28, 2014

In an article in the Wall Street Journal, Gal Luft and Robert McFarlane write about the impact of Iraq's oil production on the total global oil supply, which, of course, is a key factor in the global price of oil. And since the price of oil is the most important element of the vitality of the world's economy, Iraq's oil production is important to all of us. What will the recent trouble in Iraq do to the price of oil and the world's economy? They write:

Last month the International Energy Agency noted that "in the long term Iraq is set to become one of the main pillars of global oil output, and will also become the largest contributor to global oil export growth." Iraq was expected to produce nine million barrels a day by 2035, surpassing Saudi Arabia as the region's largest exporter. Now the ISIS takeover of large swaths of oil-rich Iraqi territory threatens this hope.

The potential implications for the world economy are serious. Other than the North American shale-oil boom, which has brought an extra three million barrels a day online over the past several years, there has been very little good news in the oil market. Saudi Arabia's production is stagnant at around 10 million barrels a day and its political future is in doubt. The country's gluttonous oil consumption — with only 28 million people, Saudi Arabia is the world's fifth-largest oil consumer — leaves less and less available for export. Meanwhile, Nigeria is facing problematic elections next year that could blow the top off an already shaky political system, Venezuela's oil industry is on life support, post-Gadhafi Libya is faltering, and the outputs of Russia and Iran are clouded by sanctions.

What is at stake is not only the loss of Iraq's current output but its ability to secure the investments necessary to deliver the additional six million barrels a day the market is counting on. Today over 80% of the global investment in upstream oil and gas goes to replace depleting fields, and the Middle East accounts for only 15% of the world's overall upstream investment. With Iraq sinking deeper into protracted civil war, investment will fall even more, creating fuel shortages down the road.

The authors suggest several steps the U.S. could take to minimize our economic vulnerability to oil's unpredictable supply. Their most important recommendation is to "significantly increase the number of vehicles that can run on fuels made from natural gas and coal..."

They don't necessarily mean cars that run directly on natural gas and coal. "With minor adaptations to vehicles," they rightly point out, "natural gas and coal can be put to use in the form of alcohol fuels such as methanol and ethanol. These can be easily blended with gasoline and hence reduce transportation's dependence on oil.

"For the foreseeable future, oil will continue to be the lifeblood of the global economy. Our hope is that the turmoil in Iraq subsides and its oil fields reach their full potential. Meanwhile, the least we can do to protect the world economy from future oil shocks is to keep the price of oil at bay by allowing drivers to switch on the fly from gasoline to non-petroleum fuels."

Read the whole article here: Turmoil in Iraq Spells Trouble For Oil Markets.


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