Oil demand to rise as Iraq unrest spikes prices

As Iraq's mounting unrest pushes crude oil prices to their highest levels this year, a report Friday predicts that global oil demand will increase and Iraq will be a key producer.

The International Energy Agency report forecasts a jump in global oil demand, which affects both oil and gasoline prices, from 91.4 million barrels per day in 2014's first quarter to 94 million during its last three months. It also says that Iraq was expected to account for 60% of production growth from the Organization of Petroleum Exporting Countries for the rest of this decade. Iraq, which has the world's fifth-largest proven oil reserves, is now OPEC's second-largest producer.

"While Iraq's production potential is huge, so are the political hurdles it is facing," the IEA says, noting the significant gains that Sunni insurgents have made in the country's north since launching a military campaign earlier this month. The IEA says news of the Sunni advance sent prices for Brent crude — a benchmark for international oils — to nearly $113 a barrel, their highest so far this year.

Yet unless the conflict spreads, the IEA says it may not "put additional Iraqi oil supplies immediately at risk," because most of the recent production gains have occurred in the largely Shia south. Iraq's oil production reached its highest level in three decades this year, but since March, it has fallen about 10%, mostly because of northern unrest. Its exports are now coming from southern terminals near Basra.

"The question is, who is going to fill the gap? Saudi Arabia? That's what the market is looking at,'' says John Kingston, global news director for industry tracker Platts Energy.

The Sunni militants' success "illustrates the potency of the insurgent group and the extent to which the civil war in Syria has spilled over into Iraq," says Raad Alkadiri, a senior research director at IHS Energy. "It is also testament to the degree to which Iraq's ongoing political disputes, and the consequent sense of alienation and frustration that the Sunni population feels, has created a fertile ground for extremists."

He says oil and gas infrastructures in the Iraq's north "will be vulnerable to repeated attack, and the risk of disruptions to domestic product supply is high," but he expects "southern production and exports are unlikely to be directly affected."

Still, the unrest is likely to have an impact.The IEA says it makes the prospects of a return of a key pipeline, which runs from Kirkuk in Iraq to Ceyhan in Turkey but has been out of use because of sabotage since March, "look even more elusive."

The surge in oil prices could set the stage for a spike in gasoline prices, already on the rise. While gasoline averaged $3.58 a gallon between Memorial Day and Labor Day last year, retail prices have averaged about $3.65 for the past month.

Oil price increases are likely to drive the price of regular unleaded gasoline up 5 to 10 cents per gallon in the coming days and keep summer prices elevated, says Tom Kloza, senior energy analyst at gasbuddy.com

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In this series from August, 2010, as the American military presence in Iraq was being reduced, Stars and Stripes looked at the costs of the war through the eyes of Iraqis and Americans and asked: What difference did we really make?