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Plunging Oil Prices Threaten to Destroy Iraq

Plunging Oil Prices Threaten to Destroy Iraq
February 17
10:24 2016
The picture above shows a member of the oil police force patrolling the Nahr Bin Umar oil field in Iraq. In the United States, the dip in oil prices is having a negative effect on the stock market, oil companies, and the entire energy sector. In countries whose economies depend on oil exports, the effects will be much worse.

Saudi Arabia is instituting an unprecedented and austere tax to compensate. Nigeria is asking the World Bank for an $11 billion loan. But the country of Iraq, which is already teetering on the brink of collapse, has done nothing.

Iraq is currently selling oil at $22, which is barely half of the country’s break-even price. In recent years, Iraq’s national budget has been based on the assumption that the price of oil would stay around $90. If the price of oil does not go back up, Iraq will have no way to fund the upcoming year of government obligations.

The price of oil is expected to remain under $40 for the entirety of 2016.

While Iraqi oil is relatively cheap to obtain, it also contains lots of sulfur, meaning that is sells for about 10% less than the global price benchmark. The country is still making money by pumping oil, but not nearly enough to fund the nation’s anticipated budget for 2016.

This daunting fiscal challenge could be overcome by a stable, politically coherent nation. But Iraq is currently split between the Kurdistan Regional Government and the terrorist group ISIS. Areas that exist under some semblance of governmental control are constantly fought over my militia groups representing various political parties.

“You are looking at a significant possibility of state collapse to civil unrest,” said former Exxon executive and current Dragoman Partners CEO Ali Khedery. Even worse, cheap oil will affect Iraq’s ability to fight ISIS, which is currently in control of the country’s second-largest city (Mosul).

When the US invaded Iraq in 2003, the country had about 850,000 government employees. Now, Iraq has more than two and a half million. This statistic lines up with Iraq’s transformation from a powerful, centralized state led by Saddam Hussein into a loose and often violent federation infested with terrorists and guided by shaky leadership.

“Why did the number of government employees go up 200%? The reason is that Iraq is a kleptocracy built on systemic corruption and patronage as a means of buying votes,” explains Khedery. As a result, the country has virtually no ability to hedge against the plunge in oil prices. “Unlike Russia or Saudi, which have hundreds of billions in hard currency reserves and trillions in assets and state owned entities, Iraq is insolvent and bankrupt,” he adds.

map_of_iraqAn Iraqi “hard landing” has serious ramifications, says Khedery. With plummeting federal revenue, the division between the Kurdistan Regional Government and the Baghdad-administered Iraq would grow even stronger. And what would happen to Basra – a painfully important city located near the southeastern tip of Iraq which functions as the country’s prime export point?

The federal government is already struggling to stop ongoing violence in Basra between Shi’ite factions. “The militias are going to start turning on the state, and they’re going to start turning on each other,” Khedery says. “They’re basically vultures who feasted on ethno-sectarian hatreds and high oil prices and patronage. And now they’re going to have to start fighting each other for the scraps as the oil-funded pie has shrunk by more than 80%.”

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April Kuhlman

April Kuhlman

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