The fallout from the Middle East's deadly oil game

Turmoil in the oil-rich region of Mosul in northern Iraq has put a dent in Iran and Iraq's hopes to increase oil production capacity and break Saudi Arabia's stronghold on crude.

Behind the capture of Mosul by Sunni militants with links to al-Qaeda is a deadly game of oil politics.

Earlier this year, Iraq was proudly announcing a plan to increase its oil production capacity threefold by 2020. Together with Iran, Iraq planned a strategy that would challenge Saudi Arabia's grip on the Organisation of Petroleum Exporting Countries.

The plan by Iran and Iraq to attack Saudi Arabia's status as the ‘swing producer’ in the OPEC cartel was a move that could have caused a dramatic fall in oil prices if Iraq broke the OPEC quotas and sold more of its crude on the open market.

The extent to which the planned big rise in Iraq oil production would reduce future oil prices depends on world growth in oil demand. If the oil price did fall, it would hit Australia’s gas revenues, which are mostly tied to the oil price. But it would have been a disaster for the Sunni-dominated Saudi Arabia. To the extent that the current troubles firm the oil price, Australia and Saudi Arabia are beneficiaries.

Many saw the planned Iraq-Iran oil production increase as a Shia plot against the Sunni in Saudi Arabia. I do not know the extent to which the Sunni-Shia rivalry extended to an oil war.

Under the grand Iraq-Iran plan, part of the planned increase in oil production capacity would have come from the exciting new fields that are being discovered around the region near Mosul and nearby Kurdistan.

It’s now highly unlikely that these fields will be developed given the turmoil in the area.

Currently, Iraq produces about 3 billion barrels of oil a day but the bulk of the production comes from the southern, more stable regions. Part of Iraq’s current output is sent to Turkey via a pipeline, which passes close to Mosul. It has been cut in the fighting.

The Mosul capture will stop oil development in the area but given Iraq’s oil reserves in the south, it will not slash current production.

In previous years the US was very dependent on Middle Eastern oil, but the development of US shale oil has greatly lessened US dependence on the Middle East.

The Middle Eastern map was drawn by the old colonial powers. We may be looking at a remaking if the map that sees Sunnis living in some areas and Shia in others. This will be very disruptive for the population, but they are finding it very difficult to live together in the same space.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles